Over the last few weeks, we have been witnessing unusual price action in the global financial markets.
We have been suspicious of this “weird” price action and have raised a red flag to our paid subscribers over the past few weeks.
Now the market participants have taken note as well:
The two most unusual price charts of the week are:
Momentum (MTUM) & Mag 7: For the first time, Mag 7 has decoupled from momentum. Momentum (MTUM) has faced one of the biggest plunges ever seen and, as a result, the decoupling.
Gold & BTC: The second is the positive correlation of Gold and BTC. The last time Gold & BTC were this positively correlated was in November 2020.
Notably, we have recognised much more while analysing market internals across assets.
We believe that the unusual behaviour can be explained by the following:
From energy markets to bond markets, governments are intervening in financial markets, which hinders normal market functioning.
Non-hedge-fund market participants are using AI to backtest and generate strategies based on historical correlations, which has likely broken correlations across the board.
Thus, expect the bizarre market behaviour to continue.
We are down 0.25% this month; however, we are up 7% YTD.
Let us take a deep dive into the macro universe and comprehend the cross-asset price action.
US/Equities/Bonds/Dollar/Gold/Oil/!
Our preferred indicator for tracking the cyclical economy is the ISM Manufacturing.
The headline index was slightly below expectations and softened a bit from the July reading.
This was largely due to lower new orders, imports and a fall in the backlog of orders.
Nonetheless, prices remain extremely high, partly due to supply chain pressures across industries.
The respondents’ comments are intriguing:
“The economy is annoying; it is getting in the way of otherwise good business. We are making great new products but struggling to compete when prices escalate due to things like tariffs and the conflict in the Strait of Hormuz. I fear that the inflation caused by these factors will lead to lower sales and lower spending power of our customers. Call it inflation! At some point, it leads to an economic downturn or at least an economic pain for many consumers. It’s an uncertain year, our second in a row.” [Chemical Products]
“The supply chain situation, especially in the electronics market, is going through another crisis even bigger and more complicated than during and post-COVID-19. That’s mainly due to AI infrastructure and uncertainties in the global market (for oil and other critical supplies) due to war in the Middle East and more complication on trade rules.[Computer & Electronic Products]
Prices continue to rise on all goods. Suppliers are noting that energy, steel and labor costs are increasing very quickly. We continue to try to move products around to offset costs. We have moved more products to offshore sources to try to minimize cost impacts.” [Machinery]
The situation is so dire that it is being compared to the COVID era.
Orders Less Inventories has been consistently falling over the last few months, suggesting that the headline PMI will likely trend downward as we approach the mid-term elections.
ISM Services came in at 55.4, a slight beat against the market expectations of 54.1.
The index was pumped by higher New Orders, Business Activity, and Exports and Imports.
Overall, Services activity looks much more buoyant than manufacturing activity, according to the ISM data.
Nonetheless, the ISM Services prices remain extremely elevated and continue to move higher.
We have shown in the past that ISM Services Prices is tightly correlated with CPI/PCE data, and thus expect inflation to persistently print comfortably above 3% in the coming months.
We also got a slew of labour market data.
ISM Employment: ISM Manufacturing and Services Employment PMI is undergoing divergence. While the services PMI has moved into the contraction zone (likely also due to the World Cup being over and the temporary layoffs related to it), manufacturing PMI continues to move higher. It is back in expansion territory after a long time.
NFP-1: Leisure and hospitality saw an enormous addition of jobs, which was a bit surprising, as we expected a negative-to-flat print for the sector after the end of the FIFA World Cup. Local government was up 50k, as local school education added 42k jobs, offsetting prior-month losses. On the contrary, financial activities and information continue to lose jobs as AI-led automation leads to higher productivity. The UR came in at 4.1% and thus, the labor market remains exceptionally stable.
NFP-2: The last two months saw stark negative revisions; however, even the revisions threw up a surprise this month, as June and July payrolls were revised upwards by 55k.
Equities!
SPX!
As discussed last week, SPX again took support at the “breakout” level of 7620.
Note that it has been 3 weeks since it has been taking support at the critical level, and we need to move higher; otherwise, we risk a break of the level and a test of 7450.
However, when we look at the internals, we believe that the momentum is gradually building in: