Dusting Off the Hawk Costume

Powell celebrated too early.  At the Decemember 2023 FOMC meeting, he spiked the football at the 10 yard line, before getting to the end zone.  Bonds and the yen are taking the brunt of the pain this year for that premature celebration.  Powell is a politician, and he flows with the crowd, and the crowd is worried about sticky inflation.  After 3 straight higher than consensus CPI reports, he cannot come out sanguine and dovish at this FOMC meeting.  Even if he wants to be dovish, he just can't do that again.  He would look completely out of touch with reality if he did it.  So expect Powell to dust off the hawk costume from 2022 and try to reestablish some inflation fighting credibility.  You already heard him at his last speech getting rid of his rate cuts forward guidance for this year.  He'll likely go even further into hawk mode at this meeting.  

The bond market and the currency market (especially the Japanese yen) have already caught on and expect the Fed to stay higher for longer.  Its basically the consensus view at this point, which means its going to take a lot more hot inflation data to selloff the bond market further.  The odds are now skewing more in favor of betting on rate cuts again, as the Fed is still looking to cut as soon as the data cooperates.  And with consensus CPI expectations going higher, it will make it more likely that the CPI actually comes in cooler than expectations.  The CPI is such a manipulated and manufactured number that hedonic pricing influences will always keep the number lower than it should be.  Add to that the seasonal effects that gave hotter CPI numbers for the 1st quarter.  You are likely to have the opposite effect in the next few months, pushing the numbers lower than it should be.  Plus the owners equivalent rent calculation is so lagged that it still hasn't priced in the lower rent inflation of 2023.  That should flow into lower housing inflation numbers in coming months. 

From a big picture perspective, my views are still the same.  High valuations and excessive economic optimism (most believe either in a soft landing or no landing, see below). 

Futures positioning is also unfavorable for the next several months, as you have commercials go net short ES over 200K contracts over the past few weeks.  Commercial net positioning of -200K or more has been seen near tops in January 2018, October 2018, and late 2021.  Also, small speculators have been building up long positions throughout this year, which is also bearish long term.  It isn't great for short term market timing, but its a good indicator for showing that the market is vulnerable to a big down move within a few months. 

ES Commercial Net Position

ES Small Speculator Net Position

10 year yields at 4.68% is getting close to a decent short term buying opportunity, although I would wait for the FOMC hammer before buying Treasuries.  Perhaps 10 year yields of 4.80%-4.90% would be place to put in bids for a return to a move towards 4.40%-4.50%.  If we do get the Powell hawkish hammer that I am expecting, that should also push SPX down towards 4900-4950, breaking the previous lows from monthly April opex at 4953.  That could be the final flush out of this move, which would coincide with how many of these extended selloffs usually last, which is ~ 1 month.  This selloff from the all time high started on April 2, so we are closing in on 1 month.  

I sold the rest of my SPX longs yesterday.  Now looking to buy dips on SPX and Treasuries after FOMC.  If the SPX can get to that 4900-4950 zone, the plan is to get long and hold for a intermediate term move higher that could last 4-5 weeks.