Discussion
Europe is unquestionably in recession, yet its CDX index is not far off its early 2023 lows, and just this morning it’s down another 4 bps in what tends to be a prelude to US HY CDX action come the 7:30am EST open.
The bottom line is that risk markets continue to shrug off weak economic data, and not just at the index level. Defensive sectors are very weak, outside of a day or two of outperformance here and there, and, most importantly, VOL continues to “get sold into the ground.”
Putting all the pieces together over the last week, tomorrow’s Core CPI print is really, really key. The Fed has guided to at least a skip in September if Core comes in soft, and Fed Funds futures pricing confirm with only one more hike priced in.
The set-up for the squeeze to 4600/4700, if not ATHs, is in place. This morning, Europe is the tell.