Weekly Investment View: Why the Fed Will Not Save the S&P

This Week

• US Macro – Dominique argues this week’s CPI release will be key for markets as they look to the Fed for support amid the equity selloff.
• US Rates – Antonio expects more economic slowdown in the US, more downside to US equity and the dollar, and is still bullish US rates.
• EM Macro – Caroline preview Poland’s presidential election, where far-right candidate Slawomir Mentzen is gaining ground.
• China – Liang stays bearish on CNH vs USD ahead of potential additional tariff hikes in April, while an unimpressive NPC keeps him bearish China equities.
• EZ and UK Macro – Henry argues the path towards more European issuance has now been set, and that European rates can continue to sell off.
• Canada – Viresh expects the BoC to cut 25bp tomorrow.
• Commodities – Viresh argues the oil market selloff is an overreaction and has gone long COK5 at $69.8.

Link to Appendix: Trade Table

Dominique Dwor-Frecaut – US Macro

With the SPX down 9% from its peak, markets have turned to the Fed for support. But Fed action is constrained by inflation: markets could therefore react strongly to the CPI, this week’s key release, if it surprises on the upside. Sam’s model predicts core CPI at 0.35%, which could round to 0.3% or 0.4%. Markets are likely to react more strongly than the Fed to a 0.4% core CPI print. This is because the Fed is targeting core PCE rather than core CPI. We will get an estimate of core PCE after Thursday’s PPI.

In addition, the Fed does not react to single data points but rather to the totality of the data. To ease policy, the Fed will seek signs the economy is weakening and/or that inflation dynamics are weakening, which the CPI or PPI releases will not include.

Antonio Del Favero – US Rates

We expect more economic slowdown in the US, more downside to US equity and the dollar, and are still bullish US rates. From here, an equity rally seems likely – and we would sell it. We still see 5500/5600 for the S&P as likely, with more downside to come (5200/5300) given our view of further economic slowdown (even if it will take time to happen). We are short the US dollar.

We expect rates to rally and re-entered long SOFR Dec25 last Friday at a slightly cheaper level than we took profit (entry: 96.35, target: 96.85; stop: 96.12) and added long SOFR Jun26 (entry: 96.47, target: 96.97, stop: 96.24). Both are 50% positions.

We were long SOFR Dec25 from 95.91 and closed it at 96.37. Then last Friday we went long again SOFR Dec25 at 96.35 and added SOFR Jun26 at 96.47.

From here, we see risk that rates sell off on an equity rally and/or a strong CPI (I agree with Dominique’s comments above). If that happens, we will consider adding risk to our trades.

Caroline Grady – Emerging Markets

Poland’s 18 May presidential election is gaining attention with the increasing popularity of the far right. Confederation’s Slawomir Mentzen is now in second place in some polls, leaving the potential for him to advance to the second-round run-off with Warsaw mayor and KO candidate Rafał Trzaskowski. PiS’s candidate, the historian Karol Nawrocki, has dropped into third place.

Mentzen first climbed into second place in a late February poll by SW Research with 18.9% support (versus Trzaskowski at 33.6% and Nawrocki at 16.5%). Another poll this week by Instytut Badan put Mentzen at a higher 22%, with Trzaskowski at 37% and Nawrocki at 21%. Polling website eWybory also shows increasing support for Mentzen this year but leaves him firmly in third place.

Whether the recent increase in support translates into votes remains to be seen. Support for Confederation increased sharply ahead of the 2023 general election, but the party ultimately won only 7% of the vote.

The second-round run-off is scheduled for 1 June. A win by Trzaskowski should allow Tusk’s government to proceed with its policy agenda with the threat from a presidential veto gone. But the KO coalition will continue to face disagreements, particularly on the promised liberalization of the country’s abortion laws.

Liang Ding – China

Since the peak of the 2-year US government bond yield two months ago, DXY has dropped 5%. CNH has appreciated 1.4% vs the USD. However, the appreciation has lagged most of the major currencies, especially considering the 86bp tightening of the 2-year interest rate differential (Chart 3).

On one hand, the PBoC has kept the daily USDCNH mid-rate barely moved at around 7.18, which suggests that unlike in the past, the PBoC has no intention of strengthening the RMB. On the other hand, in the onshore market, USD scarcity has remained elevated, and the yield pickup of the implied 1-year USD interest rate compared with the offshore market has stayed at around 70 bps.

We stay bearish on CNH vs USD ahead of potential additional tariff hikes in April. The US government bond yield may drop again because of the tariff announcement, but the historical data shows USDCNH is more driven by the basic balance than the interest rate differential. The openness of the current account and only partial openness of capital account has led to this result. With January to February trade data already showing fading of export frontloading, we expect the trade surplus to fall in the months ahead.

Last week’s NPC confirmed the government will follow last year’s approach of combining modest fiscal, monetary easing, and debt relief for local governments. But despite big headline fiscal borrowing, the NPC offers only weak fiscal support due to the uncertainties regarding government revenue. We stay cautious about domestic price development and corporate profitability given the big uncertainties regarding external demand and keep our bearish view on broad equity market index CSI 300 also unchanged.

Henry Occleston – Eurozone & UK Macro

Europe sees minimal data this week. UK January GDP is on Friday (expectations are for a January bounce). We also get final French, Spanish and German February CPI (we will watch the wage-intensive services component for confirmation that the Q1 trend remains hot, Chart 6).

This does not mean the week will be uneventful, though. The passage of the plans to suspend the German debt brake will be important. The latest timeline is:

• Bundestag discussion aimed for Thursday (13 March).
• Aim to wrap up the legislative process next Tuesday (18 March).
• New parliament sits the week after (25 March).

Within this, we will be watch for:

• How talks between the Greens and the SPD/CDU go.
  • I expect they will eke out some concessions but ultimately support it. They risk losing a big opportunity to fund their initiatives otherwise.
• Any signs that the FW in Bavaria will back CSU on the changes in the Bundesrat (the State representatives), as they have the power to veto the supermajority there.
  • I expect, ultimately, they will back it, perhaps after their own local concessions; yet this is a bigger unknown.

Regardless of the noise and potential delays/reductions, I still think the path towards more European issuance has now been set, and that European rates can continue to sell off. I am paying 10Y EUR and am positioned for 2s10s Bund steepening.

Elsewhere, we will hear from ECB speakers. With policy rate now at 2.5% (the upper range of neutral), inflation overshooting in Q1, and the fiscal boost, I expect hawkish noises to grow from here. The ECB may end up only cutting once more this year. I stay short ERZ5.

Viresh Kanabar – Canada

We expect the BoC to cut 25bps tomorrow.

Since the last meeting, the data has generally been positive as the economy benefited from the recent tax holiday. However, tariffs continue to weigh on the economy, as shown by small business sentiment falling back to March 2024 lows across many industries in February. Moreover, the size of tariffs continues to change by the day, which is compounding on the economy. Per the BoC, broad tariffs around 20% could reduce growth by 2% this year, meaning the tendency will be to support the economy.

Staying dovish is an easier task when inflation is under control but may become more challenging if future data is sticky or if CAD goes through a sharper decline in the coming weeks/ months. Even then, we know the timing of shocks means that the BoC will likely prioritise growth rather than inflation, particularly while the labour market is loose and rates are broadly around neutral.

The presser will provide more information on how the BoC is looking at the economy, but we expect Gov Macklem to echo the thoughts provided in January and his recent speech. I am particularly watching for signs of a further 50bp cut by June (i.e., a 2.25% rate).

Viresh Kanabar – Commodities

The oil market has done it again.

The decision to increase production by the eight countries with ‘additional voluntary cuts’ is not bullish. But the selloff is an overreaction. For Q2, we think this decision is most impactful from a signalling perspective rather than on balances. The actual impact may be as low as +80k b/d – which is just noise.

Ahead, we expect mean reversion in flat price to $75/bbl, driven by:

• 1. Delayed non-OPEC production growth.
  2. Low inventories.
  3. Kazakhstan’s commitment to its quota.
  4. Low positioning.
  5. Potential for Chinese buying to rise.

The most interesting point is how robust time spreads have remained. Over the past month, flat price has fallen by $6/ bbl, while time spreads have rallied 5c.

This tells us the market’s inference of current balances remains constructive despite weakening sentiment. From here, ether spreads fall and fundamentals weaken, or flat price resets higher. We expect the latter

These factors lead to a FV price for Brent of $75/ bbl per our physical model. The model’s range has also narrowed to just 50c, meaning model inputs agree with each other.

We go long COK5 at $69.8 in our model portfolio. We assign a stop at $68.0 and target $75.0.

Appendix: Trade Table

Table 1: Current Trades
*Total returns using daily close price. Positions are sized such that impact of any one trade on portfolio is no larger than 50 bps.
Asset Class	Date entered	Trade	Rationale	Entry	Stop Loss	Target	Current Price	P&L*
FX	21-Feb-25	Short DXY (50% position)	Click here	105.080	107.900	100.500	51.770	0.7%
	21-Feb-25	Long GBP/JPY	Click here	189.740	186.000	200.000	190.995	0.7%
	12-Feb-25	Long BRL/MXN	Click here	3.560	3.400	3.900	3.473	-2.3%
	17-Jan-25	Long USD/CNH 4m 7.5×7.6 call spread	Click here	25 bps		120 bps	4 bps	-21 bps
	10-Jan-25	Short INR/KRW	Click here	17.000	17.200	16.000	16.662	1.1%
	25-Oct-24	Short AUD/NZD	Click here	1.109	1.130	1.060	1.103	0.5%
	07-Mar-25	Long SOFR Z5 (50% position)	Click here	96.350	96.120	96.850	96.435	4 bps
	07-Mar-25	Long SOFR M6 (50% position)	Click here	96.470	96.240	96.970	96.560	5 bps
	05-Mar-25	2s10s Bund Steepener	Click here	0.005	0.003	0.010	0.007	14 bps
Rates	03-Mar-25	Short Euribor Z5	Click here	97.968	98.100	97.600	97.900	7 bps
	07-Jan-25	Pay 10y EUR Swap	Click here	2.430%	2.050%	3.000%	2.733%	30 bps
	13-Nov-24	2s10s Gilt Steepener	Click here	0.000%	-0.300%	0.600%	0.346%	46 bps
	13-Nov-24	Long SONIA Z5	Click here	95.900	95.700	96.400	96.125	22 bps
Equity	03-Feb-25	Short Mar 25 FTSE A50	Click here	12900.00	13545.00	11610.00	13264.00	-2.7%
Equity	10-Mar-25	Long CO K5 (50% position)	Click here	69.80	68.00	75.00	70.11	0.2%
Source: Macro Hive

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs. You are not permitted to publish, transmit, or otherwise reproduce this information, in whole or in part, in any format to any third party without the express written consent of Macro Hive. This includes providing or reproducing this information, in whole or in part, as a prompt.)