Shortened OPEX week has two distinct phases this past week:
1 Equity and fixed income market weakness for the first two days;
2 Equity market strength in the last two days of the week while bond mkt was weak.
3 Dollar has been strong, consistent with interest rate moving higher. Gold and Bitcoin weak for the same reason:
=================Macro Events Last Week ==================
On Tuesday, 11 AM Waller speech walked back on 2024 cuts in interest rate as well as pushed back on timing of QT tapering. Weds's hot retail sales number further reduced numbers of rate cuts expectations in 2024. Last Friday after soft PPI number, market priced in almost 7x 25 bps cuts. That number has been down to 5.5 cuts now, ie market squeezed out 1.5 cuts this past week. March rate was priced in with 80% probability previously. Now it is down to less than 50%, which needs to be squeezed out in the Jan FOMC meeting if Fed wants to correct the market's (wrong) expectation:
Also note 30Y yield has been up for about 40 bps from December 23 low of 3.95%, and now is around 4.35%:
The equity market so far has not been fazed by the rise in interest rate. Tech sector, Mag 7 in particular, has been somehow insulated from interest rate movement. The divergence makes valuation more stretched for the sector (chart below is QQQ-TLT ratio):
SPX and NDX are clearly in break-out mode. The short-term issue is how much of that is opex-related (dealers hedging ITM options in both index and name stock options). The intermediate term issue is how long the divergence between equity and bond can stay. We will know more next week where dealers lost a significant amount of long gamma positions.
============== next week (01/22-01/26) =============
Most important macro data point next week is Friday Core PCE data. CPI and PPI from last week pointed to colde number, which is argubaly price in already. This is the final data point before January FOMC on 01/31.
Of course we are in earnings season. But that tends to affect individual companies but not the overall market much.
Just my 2c
