SignalPlus Macroeconomic Analysis (20240417): Market Resumes "Soft Landing" Narrative

In the past week, the slowdown in economic growth and the decline in inflation expectations have once again sparked the narrative of a soft landing. This is not the first time we have seen such a situation, and the most natural market reaction at this time is the FOMO sentiment in stocks, buying credit instruments, collecting fixed rates, shorting volatility, and earning arbitrage profits. This has almost become the standard script since the last FOMC meeting, and there are no signs of this trend slowing down without any significant changes.

The stock market reached a new high last week, with the SPX rising 1.5% and breaking through 5,300 points. Among them, automakers (+4.4%), technology (+2.9%), and real estate (+2.5%) performed particularly well in a friendly financial environment. The yield on the 10-year U.S. Treasury bond fell by 8 basis points, down 27 basis points this month. Meanwhile, oil (+2%), gold (+2%), and copper (+8%) also saw a good rebound this month. As the Wall Street Journal article stated, what is there not to like about the current investment environment?

In addition, Wall Street traders believe that the recent stock market rebound has shifted from pure short covering to new long positions. Citigroup estimates that over the past month, more than $50 billion has been added to SPX index futures, while the ICI reports that due to retail investors chasing profits in this rebound, more than $20 billion in domestic stock ETFs have been issued in the U.S. since the beginning of the month.

The flow of funds in stock options also points in the same direction, with binary options (digital options) pricing reflecting a 25% chance that the SPX will rise another 10% by the end of the year. Additionally, during this rebound, the call/put ratio of 0 DTE options has risen again, with about 56% of the trading volume flowing into call options.

Interestingly, behind all this frenzy, the 30-year bond is behaving like an outlier. According to BoA's estimates, the 30-year bond is heading toward the third worst annual return in a century. Loose government spending, uncontrolled budgets, overly accommodative financial conditions, and a Federal Reserve that tolerates inflation (where is the promised inflation target?) are negatively impacting long-term interest rate instruments. Generous fiscal policies will ultimately be paid for through higher real rates and/or a weaker exchange rate, but the time has not yet come…

This week, there isn't much noteworthy data before Nvidia's earnings report, and then data will again enter a holiday mode before the non-farm payroll data and FOMC + CPI in the first two weeks of June. Based on Nvidia's weight in the SPX index and the implied volatility of Nvidia options, the company's impact on the SPX index on earnings day is +/- 0.4%, and the positions in this stock do not seem to be as concentrated as they were at the beginning of the year.

There isn't much noteworthy news in the cryptocurrency space. The short-term correlation between BTC prices and the Nasdaq index has reached a high since the third quarter of 2024, with positive price movements. Native investors expect to challenge historical highs again in the coming weeks. Nothing changes market sentiment more than price, and currently, nothing influences cryptocurrency prices more than stocks. Everyone became interest rate traders in the first half of 2023, and now has every macro asset class become a de facto day trading tool for the Nasdaq? Hopefully, the temporarily paused market can provide everyone with some much-needed breathing space!