What happened last week
- Price Action: U.S. and global stocks ended the week practically unchanged despite Monday’s historic volatility.
- Carry & Dispersion Trades: Unwinds in the carry and dispersion trades contributed to the sell-off on Monday; a doubling down or flushing out of positioning likely contributed to the equity market’s intraweek recovery.
- Data: Smaller than expected increase in initial unemployment claims prompted the largest one-day rally in U.S equities since November 2022.
What we’re watching this week
- Inflation: The Producer Price Index (PPI) to preview Consumer Price Index (CPI), which is expected to show year-over-year headline inflation rose by 3.0% and core inflation by +3.2% in July.
- Growth and Consumer: Retail sales; earnings (Walmart and Home Depot) and consumer sentiment.
- Geopolitics: Iranian attack on Israel supposedly “imminent”; negotiations between Israel and Hamas set for August 15th.
Horizon’s Investment Management Views
Last week kicked off with a continuation of the sell-off catalyzed by weak economic data, summer illiquidity, and an unwind of the popular yen carry trade. The higher near-term recession probability implied by softening data was not baked into asset prices and this disconnect was a factor in some of the violent price action realized on Monday. Although we are not in the recession camp by any means, we do acknowledge the data indicates that growth is slowing. However, we do believe the recession narrative will influence investor sentiment, coloring their interpretation of the data and influencing price action.
Monday’s price action was historic. The intraday Volatility Index (VIX) spike was the largest on record. Despite the extreme volatility on Monday, both U.S. and global stocks ended the week little changed. The recovery was partially enabled by a few better-than-expected data releases, including unemployment claims. Although the data was meaningful, the intraweek recovery was primarily driven by more technical factors. Just as the selloff on Monday was exacerbated by unwinds in the yen carry and dispersion trades, two popular trades with “fast money” managers, the recovery was enabled by the flush out in positioning within those trades and a likely “double down” by both carry and dispersion traders, depressing volatility and supporting risk assets. The flush out in positioning could be healthy and may set us up for further upside over the next couple of weeks, barring other external shocks.
This week, we will get updated U.S. inflation, retail sales, consumer sentiment, and industrial production figures. Retail sales will likely matter more for markets than inflation moving forward as growth concerns outweigh inflation considerations within the Fed’s reaction function. Earnings releases from Walmart and Home Depot will help contextualize the retail sales report with corporate fundamentals and guidance. Lastly, we are closely monitoring rumors of an imminent Iranian strike on Israel and any possible reaction in energy markets.
The Producer Price Index (PPI) measures the average change over time in the prices domestic producers receive for their output. The Consumer Price Index (CPI) measures the average change in prices paid by consumers over a period of time for a basket of goods and services. The Chicago Board Options Exchange’s CBOE Volatility Index (VIX) is a measure of the stock market’s expectation of volatility based on S&P 500 index options.
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