Alright you degenerates...

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Most people realized they weren’t economists last week as CPI came in hotter than expected. In the weeks leading up to the print, players were giddy in anticipation of a Fed pivot. Traders drooled that a muted inflation print would prompt the Fed to pump the brakes. This obviously didn’t happen, causing many to reevaluate their recent buys. Anyone hoping for anything less than a 75bps hike in September was left sorely disappointed. Sentiment cratered following the print as traders scrambled to unwind their long positions. When the Fed pivot narrative got crushed, so did bullish confidence. Despite the gloomy backdrop, players hoped the Fed would show some mercy if the CPI print came in cooler than expected. Unfortunately for bulls, the perceived "light at the end of the tunnel” was an illusion.
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The comments from FedEx’s CEO only exacerbated the damage. If the inflation fears weren’t enough, Raj Subramanium hit market participants with a double whammy, expressing worries about a deep global recession. Not only did he cite concerns about his own company’s future, but also businesses worldwide in general. Players took this to mean that companies across the board were in for a brutal earnings season, depleting investor confidence even more. This report set the tone for the upcoming earnings season. Similar to Q3, players are bracing themselves for the worst and are positioned accordingly. Fund Managers have raised more cash this September than in December of ’08 during the Great Financial Crisis; you couldn’t have a clearer snapshot of overall pessimism in the market.
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However, a silver lining came out of the recent selling. CTA positioning may give bulls a more optimistic outlook for the new month. As we mentioned last week, they have already exhausted the bulk of their selling, setting up a more favorable risk/reward on the bullish side. CTA's will have $161B to buy in an “up big” month compared to $48B to sell in the event of a bloodbath. This asymmetry gives bulls a tactical advantage because the upside potential is greater than the downside potential.
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We wish we had some juicy flow to share, but unfortunately, the story hasn’t changed from last week. We didn’t see any clean bets in the flow last week; no one wanted to get in the middle of the aggressive selling towards the end of the week. Keeping an eye on sweeper activity will be crucial this Wednesday with FOMC in focus. Seeing how players behave coming out of the event should provide some clarity on overall sentiment and attitude towards the market.