Ok, markets are finally paying attention now.

After a long period of complacency to overlook every single macro concern and event risks thanks to AI / dovish Fed / lack of recession concerns, we saw a notable change in US investor behaviour as they aggressively sold the NY open after a decent market recovery in the Asia overnight session.

For what felt like an eternity, we have been accustomed to dip-buying in the US with stock market bears practically extinct after months of relentless rallies. Is this (finally) the beginning of the of a change in equity investor behaviour as the recent yield rises (2yr ~4.9%) is starting to reverberate back into overall sentiment? Has there been enough PNL damage in fixed income and crypto land to warrant a biggest shift to a defensive stance? While it’s too early to say, the early tremors are definitely being felt, and this is definitely something worth keeping an eye out as earnings seasons will kick into full force over the next 2–3 weeks.

On the data side, US consumer exceptionalism continued as March retail sales surged with headlines rising 0.7% and ex-autos jumping +1.1%, both substantially above forecasts. Strength was universal across core spending, control groups, and on real goods. The continued consumer resilience will serve to boost GDP forecasts and pressure rate cutting odds, with June probabilities dropping below 20%.

As the Fed continues to find creative narratives to justify their dovish narrative (NY Fed Williams: “still expects rate cuts to begin this year”), the rate market is self-adjusting with inflation expectations climbing aggressively. 5yr inflation breakevens are back above 2.5%, the highest levels in well over a year, when CPI was on a very different trajectory. 2yr yields are nearing 5%, implying 1y forward yields coming at a much higher trajectory than the Fed’s own dot-plots.

The quiet discomfort over the Fed’s dovish narrative is surfacing via a jump in fixed income implied volatility via the MOVE index. After a galliant effort from Fed speakers to crush bond volatility in Q1 via their managed speeches, the market has revolted somewhat as the dovish guidance is increasingly at odds with economic strength and inflation pressures.

In fact, outside of interest rates, general volatility is rising across macro asset classes, including equities and high yield credit. Levered positioning across bonds and equites are at relative extremes as well, with CTA positioned massively short bonds (yield higher) while being close to ‘max long’ equities.

The extreme positioning could very much lead to more choppy price action over the next few weeks, given the high tension geopolitical headlines and the high bar being set for this quarter’s earning results. A weekly SPX close below the 200D moving average on the SPX could compel CTAs to flip their bullish positioning. The last time in which it happened was in the summer of 2023, which led to a further ~5% drawdown in prices.

Finally, blackout restrictions on stock buybacks will persist until the first week of May, exposing equities to potential further downsides in the near-term. Be aware of catching falling knives too early at this juncture.

Crypto prices are similarly struggling on the overall risk-off move, with very real PNL and liquidation damages inflicted on traders, as BTC/ETH prices are down 10% on the week, while the other top altcoins have cratered by ~20% during that time. Given the extent and speed of the sell-off, we think PNL-management will be the paramount driver over halving narratives or other popular rhetoric, and would advocate de-risking leverage substantially over the next few weeks.

Macro will need some time to work out its latest feud and obtain satisfactory clarity from the Fed, while fundamental investors will need corporate earnings to justify their unrelenting faith in US stocks against the current valuation hurdle. Good luck.

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