BIG week ahead: FOMC, QRA, BOJ, ECB, AAPL, LLY, CPI, ISM, NFP oh my!!
Shorts worked Monday despite the market bounce! LOL
Tis true: Chase short TSLA, Swing short XLE and FSLR, Trend short TLT - all keep working - DESPITE mega cap tech plays like AMZN, NFLX, MSFT bouncing sharply on key COMPQ support as demonstrated Friday with my warning: Bounce Hard or Trounce Hard!!
But I still see no capitulation low - in either stocks or bonds.
VIX is coming down because it's a Monday! That makes for 17 in a row!
Bulls betting this is the turn to launch seasonality rally.
SPX 4114 is the 61.8% retracement of the Mar23 - Jul23 rally and near major psychological / chart support at 4100.
I'm not betting on that holding until I can see DXY below $105.77 on weekly support and 10Y below 4.8% to start.
USDJPY above 150 won't help that mission.
Speaking of USDJPY:
Overnight, the Japanese yen weakened to 150.65 vs. the dollar after the Bank of Japan raised upper bound reference for 10-year JGB yield to 1% from 0.5% previously while maintaining the target at 0% with an 8-1 majority vote.
The correlation between higher USD, 10Y, and USDJPY is very strong, so BOJ considering letting their 10Y exceed 1% means:
"BoJ is gathering more flexibility to allow a normalization process to begin for rates." Craig #macro-advisor-craig
And why does that matter? Let alone their previous announcement:
OCT 24TH: PLANS TO CUT FOREIGN DEBT AND INCREASE JAPAN BOND HOLDINGS.
Japan is the largest holder of US debt and equities, holding over 1.1 Trillion US dollars worth of debt.
BOJ is making hawkish sounds just as the rest of the world's central banks are pausing.
2021-2023 were the years when the Yen had an incredible bear market due to YCC – which happened to take place during the fastest Fed hiking cycle in history.
So what happens to US bonds + equities if the opposite occurs in 2024-2026?
If/When BOJ reverses negative rates and pivots, there could be an exit from the dollar to the yen.As I mentioned in my Bloomberg interview Monday:
The BOJ has been the last bank to shift its policy stance from all the CBs globally.
BOJ making hawkish moves just as the rest of the central banks are pausing can create instability.
Specifically, the implications for the Yen and risk on/risk off flows are going to be essential to monitor as we move into the end of the year and throughout 2024.
Unless the BOJ gets comfortable with the yen topping 150 and remaining there, the pressure on USTs will continue.
My market call remains:
Oct 18th the JGB 10Y yield was 0.826%, so my call for clients was a tactical swing trade that continues to work: “If 80 then 100”?!
We are more thank half-way there.
As for FOMC, I fully expect a pause – have since March 12th bank backstop date.
Instead of the FOMC decision, another headline on Wednesday bears watching – especially as so many eyes are now on the U.S. as it struggles with a growing debt problem and climbing yields that continue to make servicing that debt more expensive.
QRA is the “quarterly refunding announcement” by US Treasury, and it is the main reason markets gapped down AUG 1ST and why SPX has a gap fill at 4576!
In a nutshell, to satisfy the federal government's borrowing needs, the U.S. Treasury Department sells many types of bonds, so each quarter, they detail its menu of debt that it plans on issuing.
Heavy issuance/borrowing by the Treasury has been a big factor behind the recent run-up in long-term yields, which picked up speed August 1st and hit their highest levels since the financial crisis in 2007.
Increased war spending and tax-revenue shortfalls have also added to the national debt, which doubled in the fiscal year through September and now stands at nearly $34T. It is a key reason that Fitch striped the U.S. of its AAA sovereign rating before the last Treasury refunding announcement.
The Treasury auctions have become triggers of late for equities as bigger sales need to find a home, and relying on private placement – hedge funds, pension and mutual funds – does not replace the foreign governments and U.S. banks which have both reduced their purchases. Oh, and so has the Fed as it is still engaged in QT.
So macro moving events include how much in longer-term debt sales are needed to fund a growing federal deficit, or if Treasury will kick that can down the road and put greater reliance on short-term bills which could help stabilize/soften the 10Y yield.
Craig discussed this at length in our last Macro-to-Micro Power hour. Check it out.
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