Jobs maintain the important thing for a ‘painful’ inventory squeeze larger

With notional quick positioning on the broader market traditionally excessive, some gentle labor market numbers might spark a bear market rally, in accordance with Citi’s world macro technique workforce.

“If labor information softens, then the market narrative shifts from peak inflation/peak Fed to eventual recession,” strategist Jamie Fahy and workforce wrote in a observe. “However in between peak inflation and peak recession, there may be a interval of flux the place threat can painfully squeeze larger, given quick positioning.”

Whereas Citi nonetheless expects a tough touchdown, room stays for a pop in equities.

“The problem is that timing a recession is notoriously troublesome,” Fahy stated. “So, in a world the place the market thinks peak inflation/ peak Fed is in, however the place the economic system will not be really (but) in recession, threat property can squeeze larger.”

“Regardless of the continuing bearish sentiment this 12 months, the AAII inventory allocation survey reveals a a lot totally different image,” MKM chief technical Jonathan Krinsky stated. “The full inventory allocation continues to be 63.4%. The unfold between the inventory allocation and % bulls is ~36%. This compares to -7% on the 2002 lows and ~3% on the 2009 lows.”

“The gasoline for a bear market rally is brief SPX futures (SPX) notional positioning, which is the 92nd percentile (on a 3-year historic relative),” he stated. “Most of those quick positions start to look susceptible at index ranges ~3824. So, if the subsequent couple of payrolls and subsequent week’s CPI is gentle, then threat property shall be ripe for an additional squeeze.”

“Earlier analysis means that median trough-peak bear market rallies can vary between 13-18%, which might plausibly carry the SPX (SP500) (NYSEARCA:SPY) again between 4000-4200.”

For the U.S. greenback (USDOLLAR) (UUP), the workforce’s base case is for additional energy, with it transferring towards the euro (FXE) to $0.93 and to $1 towards pound sterling (FXB).

“The USD rallies in recessions, however with variation,” Fahy stated. “We distinguish between world and US-only recessions. The USD performs considerably higher in world recessions regardless of USRoW fairness (SPY) (QQQ) (DIA) (IWM) underperformance, in addition to the Fed chopping greater than RoW (URTH).”

“Equities unload extra in a worldwide recession, so protected haven flows dominate. In a US recession, USD efficiency is extra symmetric and tracks Fed cuts extra intently.”

In the meantime, buyers expect a depressing earnings season that may weigh on shares.