- Coiled Spring Capital Macro Report
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- Coiled Spring Capital Macro Report 5/5/24
Our Mid-week report was titled “Sea Sick” for self-explanatory reasons. The stock market tumult over the previous few weeks has been a see saw of back-and-forth mudslinging by bears and bulls. The recent correction since the end of March has injected some much-needed volatility and doubt into the stock market equilibrium. When the market gets too lopsided on one side of the boat, we usually capsize. Recall the NAIIM Index exposure coming into last month was over 100% (Mar 27th reading was ~104%). This now stands at less than 60%.
That’s quite a bit of selling by professional investors, which is why the SPX and the Nasdaq had lost almost 6% and 9% from their peak, respectively. Fortunately, we were prepared for the recent drawdown and came into Apr cash-heavy and eagerly opportunistic.
In our last report, we talked about the litany of landmines we needed to navigate this week making for a treacherous trading environment. Strong macro reports to start the week, with US labor costs rising the most in a year, stoked more inflation concerns, setting up for what most thought would be a hawkish Powell post the FOMC meeting. Inflation remains a big challenge for the Fed and continues to be one of the major swing factors for risk on/off sentiment.
Much to the market’s surprise, Powell leaned more dovish, squashed any burgeoning rate hike rhetoric, and talked about reducing QT (quantitative tightening).
The SPX completely roundtripped the early week’s losses, post the Fed, into a surprisingly soft employment report. The SPX had lost -2% into the Fed meeting on Weds, only to gain it all back in 2 days after the payroll report was issued.
We like roller coasters as much as the next person, but the market gyrations with every passing macro release are exhausting. The data dependency advocated by the Fed has created a very volatile environment for trading and investing. The good news is that volatile periods of the market reset the dynamic for the next emerging trend.
The Friday payroll report was a welcome reprieve for the bulls who have been on the ropes for weeks as rate cut projections have been pushed back with every passing piece of stronger macro data. April’s weaker-than-expected number (175K vs 240K expectation) pushed up the unemployment rate from 3.8% to 3.9%. While this is still a positive report, it does potentially demonstrate that the monetary policy is finally asserting itself to slow the economy. Recall that the mandate for the Fed was not only to reduce inflation but also to slow hiring trends. Couple this report with the ISM services report on Friday, which dipped back into contraction and hit a 4-year low. This gauge of business activity has been steadily picking up over the last 6 months. We can assume that if this weakness persists in the coming months, it will raise concerns over a broader slowdown in economic growth, given the services sector is the largest portion of the economy.
Here is a comment from the Bloomberg Economist on the ISM report:
The Fed is trying to thread the needle with the economy by choking off the money supply through higher rates. Orchestrating a soft-landing scenario has always been a difficult task for the Fed, and if they keep rates restrictive for too long, they risk sending the economy into more severe contraction. This would be the fear if the macro data precipitates to the downside. We are not there yet, but those fears must be permeating the halls of the FOMC.
Last week’s macro round trip has altered the trajectory for rate cuts. What seemed like an endless streak of unsupportive data pushing out cuts all year reversed on Weds and further into Friday.
Rate cut projections have now been pushed into Sept (88% probability) from December earlier in the week. There is now an 80% chance of an additional cut by December.
Contrast this to Monday, which was only factoring a probability of 1 cut in the December meeting.
As you can imagine, this caused quite a stir in the bond market, with the 2-year treasury falling over 30 bps. This has broad implications for the equity markets, so let’s dig in our premium section.