Market Journal: HY CDX

Discussion

VOL compression and defensive sector weakness override this for now, but HY CDX is negatively diverging from SPX on a short-term time frame and showing signs of bottoming out. Interesting in the context of signs of credit stress popping up (see The Kitty Page below).

Thinking through the path here, I said last night that next week Powell is likely to push back against this equity rally, but the more I noodle that the less sure I am of that thesis. It’s a similar set-up to the Feb 1 press conference where everyone expected him to push back against rallying stock prices, but he instead focused very narrowly on real rates as “financial conditions”. In that press conference he was adamant about the “disinflationary process underway”, and there is now even more evidence of that process in place today. So, I suspect he’ll repeat Waller’s message from last week: we’re not done, we need to see the economy slow further, and a September hike is on the table if inflation doesn’t continue to improve - but if it does, we’re done hiking. I’m not sure he’ll bless the possibility of March 2024 rate cuts or a discussion of cuts, but if he does, it’s lights out to the upside for stocks. Either way, the set-up is in place for Powell to be interpreted dovishly. But we shall see - lots of time and space to update my view here ahead of FOMC.