The Fed Is Behind The Curve… [Dirty Dozen]

“It is essential “to seek facts diligently, advice never… Money managers have to account for their actions to their shareholders, which means they have an undue fear of underperformance. We invest only our own money. Our investment decisions are driven by optimism, not fear” ~ The Chandler Brothers

In this week’s Dirty Dozen [CHART PACK] we look at FOMC dots, slowing growth, rate bets, a market sell signal, and some long USD plays, plus more…

1. Fed dots have shifted materially higher from their meeting in March (orange dots) to the most recent June FOMC (blue dots). 

2. At the same time, we’re starting to see increasing weakness in the labor market and signs of slowing growth in the economy. We’ve seen a trend of negative economic surprises since the start of the year, which are now at their most bearish levels since 2015 (BBG Business cycle surprise index in tan & economic surprise index in green).

3. BBG used data from Homebase, a small business payroll company, to show that the establishment non-farm payroll numbers have been grossly overstating jobs due to an error in their business birth/death assumptions. BBG estimates that “the 12-month moving average pace of hiring was just 61k per month in May - well below the 100k neutral job growth pace cited by Fed Chair Jerome Powell or the 250k estimated by a Brookings institution paper.” 

4. So there’s a good chance that things aren’t as hot as many think they are and when revisions come, the Fed and others in the “higher for longer” camp may find that rates need to be brought down much faster than what’s currently priced in. 

For this reason, I’m looking for an upside breakout to go long in the 3-month SOFR Dec contract, which has been trading in a multi-month rectangle pattern. 

5. A few deep-pocketed traders are betting that July will become a live meeting. BBG writes: 

“One trade on Tuesday — as investors were leaving their desks before the Juneteenth holiday in the US — showed up as new risk on Thursday. The wager was a 55,000 purchase, with a risk equivalent of $2.3 million per basis point move. This means the leveraged position would profit by about $28 million if the market forecast for a July policy pricing decision becomes a 50-50 proposition.

“A similar large buyer appeared last week, for a risk weighting of roughly $1.25 million per basis point. Total open interest in the August tenor now sits at the highest amount at any point in time, pushing well above 400,000 after the recent increase in wagers.”

6. I think we get our first cut in September but at just 10% probability for June, I think the odds are underpriced. 

7. Our Market Internals Aggregator is within spitting distance of triggering a sell signal (red dots).

8. I wrote several weeks ago about how this indicator was being distorted by the recent AI-fueled bid into utilities, which is a component of defensives, and why cyc vs def (top right chart) had been underperforming so much. But we’re also starting to see credit (LQD/IEF) negatively diverge as well (middle right chart). And if this internal breaks through its sideways range and a sell signal triggers then we’ll start turning more defensive in our book. 

9. SentimenTrader shared this study last week showing the consistently poor 1-month returns following similar negative breadth divergences in the past. 

10.  Asian currencies are dropping against the US dollar. USDJPY broke out of an ascending triangle last week. We’re long USDCNH and will be adding USDJPY to our books this week as well. 

11. The Mexican peso dropped against the dollar following Claudia Sheinbaum’s victory in the country’s presidential race. We’re interested in playing this to the long side if we see a technical reversal around its BB midline. Long USDMXN is a good way to hedge in the event we enter a period of risk-off. 

12. Large specs are near the 90th percentile of their 5-year average, showing the MXN bulls have crowded onto one side of the boat. 

Thanks for reading.

Alex Barrow

Founder & MO Team Lead, CIO at Foundation Capital, macro junky, former Intelligence professional at FBI, DIA, and DOD, USMC Scout Sniper turned yogi/meditator.

https://x.com/MacroOps
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The USD Is In A Major Squeeze… [Dirty Dozen]