Shroedinger's Cat ~ Preparation is the Key to play markets || US Politics || Macro Musings

"Many of life's failures are people who did not realize how close they were to success when they gave up" ~ Thomas Edison

Bonds made fresh highs this week as yields on US2s dipped to 4.411% and later bounced off lows to close the week at 4.517%. Likewise for US10s, yields closed at 4.241% after printing lows of 4.144% at the start of the week. US2s10s bull steepened to -22.2 bps before pulling back to close the week at -27.60 bps. 

S&P saw sharp price correction as markets reversed off 5642 levels. We identified last week that 5642 levels correspond to the 1.618% of the corrective move from 4820 to 3492 and is a level worth watching to see if prices stall here for a corrective move lower. On DXY we briefly dipped under the 104 handle to touch lows of 103.65 before closing higher on the week at 104.37. 

The move in USD index could stall at the 104.50 levels or could stretch towards 105 levels. On the US2s we closed right at the H&S Neckline at 4.52%. The narrative around Trump's policies and increasing odds of a win make me a bit circumspect if the post news drift could see the move in yields extend to 4.64% or a reversal is in the offing. 

The Interest Rate pricing was relatively unchanged with 62 bps of rate cuts priced in for 2024 and base case being of a Sep Rate cut. 

US Political Scene is rife with changing developments. Odds of Trump winning Election shot up after the failed assassination attempt. Trump also announced his VP pick ~  JD Vance, Ohio Senator. Economist notes that his decision to pick Vance is a signal of intent to reshape his party and Americans. It says Vance is a staunch isolationist, astute proponent of MAGA, favors keeping out foreign workers and foreign goods and most foreign entanglements.

 It is also being reported that JD Vance will likely push Donald Trump to make his former populist trade representative, Robert Lighthizer to be the Treasury Secretary who favors a weak dollar policy. So we could see Global Trade severely affected on rising tariffs and a weaker USD. 

According to Real Clear Polling, the odds of Trump winning the Election are at 61% making it even more important to consider how his policy leanings will shape the markets and global macro trends going forward. It's a classic Shroedinger's Cat scenario where we won't know the outcome until it happens but being prepared will go a long way. 

The most talked about of Trump's policies among others are  

1. The extension of Tax Cuts and Jobs Act which are due to expire next year. The legislation reduced the corporate tax rate from 35% to 21%, intending to boost business investment and job creation. For individuals, the TCJA lowered income tax rates across most brackets and nearly doubled the standard deduction, though it also capped state and local tax deductions at $10,000, impacting high-tax states.

2. A plan to impose 10% across-the-border tariffs (60% on Chinese goods) plus Matching Tax to raise the tariff rates at a level equivalent to what each trading partner charges on US goods.

3. Withdrawal of US from Russia - Ukraine war 

The implications of it all on markets will be for higher inflation and elevated fiscal deficits, pressure on Federal Reserve to cut rates and lower USDs + Bull Steepening of the UST. 

On the data front, this week's Economic Releases are detailed below. While the Employment numbers are definitely coming into better balance, the data on Industrial Production, Retail Sales supports soft landing as the most likely outcome for the US Economy.

June Retail Sales came in flat mom following an upward revision to the prior month figures to 0.30% from 0.10% and the Real Retail & Trade Services Sales were flat over the month. Retail Sales Control Group showed sales rose 0.90% mom following a 0.40% mom reading in the prior month. The control group is all sales, excluding receipts from auto dealers, building-materials retailers, gas stations, office supply stores, mobile homes and tobacco stores that feeds into the GDP. 

Industrial production numbers were above consensus at 0.60% mom following an upward revised prior month number of 1.00%.

The Housing data showed some recovery lead by a sharp rise in Multifamily Permits / Starts and Completions. 

The Jobless Claims data printed the highest level of Claims for 2024. The impact of Hurricane Beryl will show in the claims number and the NFP number. The BLS's challenges with estimating employment during natural disasters suggest we might see significant revisions in future reports, hence caution ought to be exercised while reading the employment figures. 

Next week sees data on Pending, Existing and New Home Sales, S&P PMI, Jobless Claims, Q2 GDP (est 2.00%) , PCE Prices, Durable Goods Orders and University of Michigan Consumer Sentiment. 

The PCE estimates are for a reading of 0.01% mom on the headline PCE and -0.01% on Core PCE Prices which translates to an annual reading of 2.4% yoy and 2.4% on Core PCE Prices. The Atlanta FED GDPNow estimate for Q2 is at 2.70%. 

That's all for the wrap, Enjoy the weekend.