Markets Nearly Flat Ahead of FOMC Despite Hot CPI Release
Our Views
- As extended as this rally might feel (20 weeks), we believe a “buy the dip” regime remains, with sentiment remaining supportive, technicals remaining positive, and flows being very supportive.
- We see cash on the sidelines having risen to a record of $6.1 trillion, but in recent meetings, many investors have expressed skepticism about this figure, arguing that much of the increase is due to deposit flight from banks into money markets. We disagree.
- Since Feb 2023, total commercial bank deposits declined $234 billion (presumably due to rate arbitrage of mm funds vs deposit cash). Since February 2023, money market fund balances surged $1.2T to $6.1T. Thus, only $234b of the $1.2 trillion rise could be from bank deposit flight.
- Where did the other $1.0 trillion come from? Well, it is certainly not bank deposit flight. In our view, this is mostly a combination of interest income (from bonds and cash), liquidation of stocks, and savings flow. To us, this is $6.0T of “dry powder” – thus, plenty of firepower to “buy the dip.”
- BOTTOM LINE: We still recommend buying the dip, as there remains “gas in the tank.”
- Bounce in Treasury yields likely proves short-lived before a pullback to new lows.
- Emerging market ETF (EEM -0.37% ) has broken out of its recent range.
- Copper’s recent breakout makes stocks like FCX 1.18% and SCCO 3.12% attractive for further gains.
- Despite the hot inflation prints, we view this as already priced in and see the biggest near-term risk to crypto as increased tax receipts and concurrent asset selling during tax season.
- While we identify tax season as the biggest near-term risk, the influx of capital into the crypto ecosystem continues to present a bullish outlook and could mitigate the impact of any macro-driven downturn.
- With the upcoming ARB unlock in mind, we believe it is prudent to manage risk by removing it from our Core Strategy. We also foresee the potential for profit-taking across all Layer 2s following the Dencun upgrade.
- Core Strategy – Flows into the crypto ecosystem remain strong. The market is still being led higher by BTC, which is a generally healthy sign for a crypto market rally. We view the next near-term risk for a pullback to be increased tax receipts and concurrent asset sales as we approach tax season. However, should the deluge of capital pouring into the crypto ecosystem continue, any dips could be shallow. Following the successful Dencun upgrade, we are reducing exposure to ETH L2s and adding exposure to different ETH beta and gaming ecosystem tokens in RON and IMX. We think it is right to continue to lean into the continued strength in SOL and remain allocated to STX through the Nakamoto upgrade in April.
- House Republican majority to shrink again with planned departure of Colorado’s Ken Buck.
- Next Friday will see another government-shutdown deadline, with funding for six major federal departments as yet unresolved.
- The thorniest and most difficult issues standing in the way of agreement involve immigration and funding for a United Nations relief agency with alleged ties to Hamas terrorists.
Wall Street Debrief — Weekly Roundup
Key Takeaways
- The S&P 500 slipped 0.13% this week to close at 5,117.09. The Nasdaq also fell, down 0.70% to 15,973.17. Bitcoin was around $68,501 on Friday afternoon, down 0.77% from its Monday levels.
- Fundstrat Head of Research Tom Lee continues to see “gas in the tank” of this rally.
- February CPI came in hot, but we expect March CPI to resume showing that inflation is falling like a rock.
“No man ever steps in the same river twice, for it's not the same river and he's not the same man.” ~ Heraclitus
Good evening,
This week, we saw the last two inflation-data releases before the next meeting of the Federal Open Market Committee (FOMC) on Wednesday, March 20. Both came in hot, yet equity markets stayed nearly flat. Our current rally has continued for 20 weeks, but in the view of Fundstrat Head of Research Tom Lee, “While this rally is certainly mature (compared to the 16-19 week duration of the last two rallies), there remains a substantial amount of dry powder to fuel further gains.”
Based on his conversations with clients, Lee believes current sentiment remains skeptical, not bullish enough warrant apprehension of an imminent end to this rally. In his view, the flows are supportive as well: even with positive net equity flows, there remains a record $6.1 trillion in cash on the sidelines. “In our view, a ‘buy the dip’ regime remains,” he said.
Also supportive of Lee’s continued constructive view of this rally are positive technical signals. As Head of Technical Strategy Mark Newton says, “Uptrends and momentum are intact and positive, and I haven’t seen the warning signs that typically suggest this rally is nearing its end.” To put this in more actionable terms: “Technically speaking, I agree with Tom that any volatility should lead to buying opportunities back to new high territory, and it’s still expected that further gains above 5200 are likely in SPX in the next couple of weeks, which might reach 5250-5300 ahead of a possible period of consolidation.”
Compared to Lee, however, Newton is perhaps slightly less surprised by enduring skeptical sentiment, due to seasonal trends. “Four straight positive months during the WINTER is normally a rarity,” he pointed out.
Regarding inflation
The February CPI report, released on Tuesday, came in hot. To a certain extent, this was in line with our expectations. As Lee discussed with noted economist Jens Nordvig during a Fireside Chat last week, much of this had to do with “residual seasonality” spilling over from the previous month, with some vendors’ annual January price increases showing up in the February CPI print because they were implemented after the January survey period.
Lee and his team also questioned some aspects of the February CPI report and whether they accurately reflect prices in the real world. When looking at the top 13 contributors to inflation acceleration (shown in our Chart of the Week), Lee skeptically and rhetorically asked: “In the last two months, did these suddenly become meaningfully more expensive? Did lodging and airline fares, and postage, delivery and internet services suddenly explode in cost?”
The bottom-line reaction to Tuesday’s CPI release: Lee and his team see the January and February CPI prints as aberrations, anticipating that March CPI will show a resumption of inflation falling like a rock.
Elsewhere
SpaceX’s Starship notched a third unmanned test flight that improved on the results of the first two. The two-part prototype launched, entered space, and flew for about an hour, though it disintegrated upon re-entry into Earth’s atmosphere. For the first time, Starship successfully opened and closed the door to its payload bay while in space, and it successfully transferred fuel from one tank to another midflight.
The Paris Club agreed to cancel 99% of Somalia’s debt – roughly $2 billion. The group of creditors, which include the U.S., the U.K., Russia, Japan, Norway, and France, agreed to waive the debt, which amounts to roughly one fourth of Somalia’s GDP, as part of global efforts to facilitate the war-torn nation’s ability to invest in poverty-reduction and economic-reform programs in the fields of health, education, and basic infrastructure.
Boeing said a preliminary investigation suggests that an unintentional seat adjustment in the cockpit was the likely cause of this week’s Latam Airlines incident, in which a 787 Dreamliner plunged unexpectedly midflight. The plane manufacturer said a flight attendant inadvertently hit a switch on the pilot’s seat while serving a meal, which resulted in the pilot being pushed into the plane’s controls. Latam did not comment on Boeing’s statement.
President Biden voiced opposition to the proposed $14.1 billion acquisition of US Steel by Japan’s Nippon Steel, citing national-security concerns arising from the sale of the iconic steelmaker to a foreign company. The merger plans have sparked bipartisan criticism in Congress, and former President Trump has also been publicly critical of the planned buyout.
And finally: Marine scientists assembled by the non-profit group Ocean Census announced that researchers had discovered 100 potentially new species in a single expedition, a feat accomplished while exploring the 500-mile-long Bounty Trough off the coast of New Zealand. Scientists collected nearly 1,800 samples during their journey, and will seek to confirm their discoveries over the next few weeks.
Important Events
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