ACTV - Weekly Commentary: Citadel Vs. Jane Street

2024-05-11 05:55:04 ET

Summary

• Financial conditions work with a leg and it appears that the loose conditions transmitted from US to the world are increasingly showing up in economic data.
• Markets expect modest improvement in year-over-year inflation readings in next Wednesday's April CPI report.
• The bond market has been performing better than I would have expected, considering the fundamental backdrop.

A week after Chair Powell encouraged the markets to keep running, run they did. The KBW Bank Index jumped 2.7% this week, the DJIA 2.2%, the S&P400 Midcaps 2.2%, the Semiconductors 1.9%, and the S&P 500 1.9%. In my opinion, the Fed apparently has no issues with a conspicuous equities speculative Bubble. No problem with a highly levered "basis trade", bubbling "private Credit", and leveraged speculation more generally.

The VIX (equities volatility) Index ended the week at 12.55, the lowest close since January 23rd. The MOVE (bond volatility) Index traded Thursday (93.85) to the low since March. Investment-grade spreads to Treasuries traded Monday at 85 bps, the low since November 2021.

Financial conditions work with a leg. And it appears that the loose conditions transmitted from the U.S. to the world are increasingly showing up in economic data. "UK Recession Ends With Strongest Growth Since Lockdown's End"; "Canada Added 90,000 Jobs in April, Most in 15 Months"; "Euro Zone Business Activity Grows at Fastest Pace in Almost a Year"; "Japan's Service Activity Grows at Record Pace in April - PMI".

Germany's DAX equities index surged 4.3% this week (up 12.1% y-t-d), France's CAC40 3.3% (9.0%), Italy's MIB 3.1% (14.2%), Spain's IBEX 2.3% (9.9%), and UK's FTSE100 2.7% (9.1%). The Hang Seng China Financials Index jumped 6.2% (18.2%).

Gold jumped $59, or 2.6%, this week to $2,361. Silver surged 6.1%, while Platinum rose 4.4%. Palladium gained 3.8%. Copper rose 2.3%, closing Friday at a two-year high. "US Sees Tighter World Grain Supplies, Sending Prices Higher." Wheat extended its blistering rally (up 6.6%), trading this week to a 2024 high (corn to early-January high).

Markets expect modest improvement in year-over-year inflation readings in next Wednesday's April CPI report. Preliminary May results from the University of Michigan Consumer Confidence survey were not encouraging. Consumer Confidence dropped to a six-month low, as one-year inflation expectations rose two tenths to a six-month high of 3.5%. Expectations were at 2.9% in March.

The bond market has been performing better than I would have expected, considering the fundamental backdrop (double threat of incessant inflation and unending supply). Ten-year Treasury yields were little changed on the week. The market closed Friday pricing a 4.92% Fed funds rate for the FOMC's December 18th meeting. This implies 41 bps of rate reduction by year-end, up five bps for the week. Perhaps the negative fundamental backdrop for bonds is today superseded by speculative dynamics....

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