Nomura Is “Underwhelmed” At Timiraos “Fed-tervention”; Beware Of “Crap-tastic” Earnings Expectations

The last few days of trading have been driven the new narrative imparted by Powell’s favorite new ‘fed whisperer’ that the elites in the Eccles Building are considering “stepping down” their pace of hiking and then a subsequent pause (not a pivot, mind!).

Nomura’s Charlie McElligott is not buying what Timiraos is selling…

I’m a bit underwhelmed by the Timiraos stuff to be completely honest, as instead of a “signaling an earlier end to tightening,” I simply took it as a “Fed-tervention” to take some “left-tail” instability out of the front-end after Terminal projections touched 5.00% last week, which then too had the dual-benefit of their cause via an “impulse steepening” in curves to push-back against their infatuation with inversions (5s30s cash from -22bps to FLAT, 2s10s cash from -38bps to -24.8bps, 2s30s cash from -39bps to -13.4bps!)

Interestingly, the dovish shifts in Fed rate trajectory expectations have started to unwind today…

And bear in mind that the year’s biggest strategy winner in CTA Trend remains “Short” in Global G10 Bonds at 12.8%ile Net, with a few “buy-to-cover” stop triggers proximate (CHF and ITA Bonds for today, along w broad STIRS), providing potential “mechanical squeeze flows”:

Yet, outside of the “end of tightening” is nearer than ever / “bad news is good news” stabilization in Assets in Europe, UK and US – we witnessed Asia “breaking” overnight.

But back to the equity market, this week’s huge wall of US corporate earnings (46% of S&P members reporting) should be top of mind for most as McElligott reminders traders that inflation is still acting as a “tailwind” for EPS via “pricing power” into a “still too strong” consumer, but this ‘potential good news’ is juxtaposed against a market positioned for “top-down” macro bearish outcomes, expecting lower volumes / sales to begin bleeding into weaker guides…

…here we go again into EPS: The “Q3 Earnings as the next (negative) ‘shoe to drop’ for Equities” thesis is again treading on thin-ice into the meat of earnings season next wk, where similar to what we saw in Q2 EPS (which precipitated / “juiced” the Summer Stocks rally), Bank earnings from JPM, WFC and BAC are showing that the 1) US Consumer refuses to crack, with credit card delinquencies stuck near the lows and net charge-off rates declining to historic lows themselves, despite card spending increases; and simultaneously, 2) that inflation continues to act as a TAILWIND for Corp Earnings via pricing-power being exhibited (PEP avg prices +17% in Q3 vs Sales Volumes only -1%!), as said resilient Consumer continues to “make it work” and spend, digesting price increases

Perversely then in the “NOW,” we see high Inflation paired with Commods prices relatively softer off the highs is then leading to a virtuous “sweet spot” environment for Corporate margin expansion

With Inflation where it is, US Nominal GDP is over 10%…so top line growth stays spicy, which in conjunction with Wage Growth at ATH and overall Employment remaining “hot” then continues this “Schrodinger’s Economy” tension: current dynamics show “still relatively strong economic conditions” (where anecdotally, Restaurants, Malls, Airports, Concerts remain “foaming at the mouth”)…but awkwardly then juxtaposed against those consensual “hard landing / recession” forwards in the market, as inflation gets stickier and expands into Services, while “lagged and variable” implications from the FCI tightening gradually bleeding the economy, causing the u-rate to move higher along with default rates

The current “average” Consumer is seemingly able to handle losses in their “securities portfolios / 401k accounts” in a vacuum (especially when those are quoted on mulit-year return basis, i.e. SPX +14% and NDX still +27% since start 2020!) when their Home values are still largely sitting near high, and most importantly, they remain employed, with recent wage increases to boot

But the future instability comes when “2 of the 3”…or “all 3” of the above factors begin working against the Consumer (i.e. that securities portfolio is getting beaten-up AND they lose their job at same time and / or their house Equity collapses), THEN the calculus changes…but that isn’t “now” just quite yet.

For now, the mega tech names in particular are pricing in huge options=implied movements around their earnings announcements:

This matters as an Equities “bullish catalyst” vs really crap-tastic expectations yet-again…and ESPECIALLY as broad-market “supply / demand” dynamics will reset thereafter, via resumption of “Corporate Buyback” flows, following earnings releasing them from “blackout”

CTA positioning remains short in stocks but is inching higher through “buy to cover” levels…

So with all that gamma ‘unclenched’ from last Friday’s opex, where do we go from here?

We now see Dealer Gamma location OUT of the “Short Gamma” territory and into stabilizing “Zero / Long Gamma”…

After Fridays OPEX, Spotgamma notes the following significant shifts…

First – the largest gamma level shifts up to 4000 from 3700. This, like a higher SG Implied Move, syncs with our view that markets will unpin from the 3700 area this week.

Second –  the Call Wall shifted to 3900 which is now starts as our overhead target into Nov OPEX.

Finally, the Vol Trigger is at 3725 and as stated on Friday – should the SPX trade above that level our models hold a bullish stance.

Since the Oct OPEX positions are now gone, we see the range from 3835 down to 3700 as quite fluid due to light open interest. Accordingly, over the next session or two, we anticipate the market surging or purging into either the green (>3835) or red zones (

With this we see options positions building in these areas, and IV reinforcing market behavior (IV drops[raises] with higher[lower] market, fueling trend).

There is this idea prevailing here that traders are essentially net short puts here, and long calls. This creates “grind down” declines in markets, but jumpy upside moves.

This is the mirror image what we generally see in call heavy, bullish markets (like last year).

SpotGamma concludes by suggesting that much of this upside vol is driven by put decay more than active call buying as we just don’t see much of the way in upside call buying.

We do however think this idea of owning “upside crash protection” is seeping into the lexicon, which suggests that many traders are on the lookout for this move.