What ratings downgrade?
Inflation down, growth back up, credit ratings downgrade
Quick summary:
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April inflation cooled more than expected: Core CPI at 2.8% YoY, headline at 2.3%, and PPI at -0.5% MoM—the lowest since COVID lockdowns.
Market rallied as volatility dropped, with VIX falling below 18 and short positioning getting squeezed.
Post-May OpEx, supportive flows like dealer hedging and CTA buying are fading, creating a short-term “window of weakness.” Coming into the weekend, Moody’s US credit rating downgrade had the capacity to become the catalyst for the sell-off into the window of weakness. Instead, investors bought the dip.
Sideways-up remains the base case into summer, but short-term pullbacks are possible.
The competition
We’re coming off a strong week in the markets, but with post-OpEx flows fading, it’s all about staying focused during this short-term window of weakness. Just like the leaderboard—things can shift quickly. So let’s keep the momentum going as small moves now can make the difference.
Keep your strategies sharp and your eyes on the top!
NOTE: For all those new to the whole thing, read more about it here or watch a video of Scott and myself guiding you through the survey, showing you all its features, and briefly explaining how the competition works.
Last week’s performance
With the market doing the exact opposite of what many feared. No breakdown in U.S.-China trade talks, and April’s inflation data actually came in better than expected. Core CPI cooled to 2.8% YoY, headline CPI dropped to 2.3%, and PPI surprised to the downside at -0.5% MoM—its lowest since the COVID lockdowns. That’s all well below the panic levels some had priced in due to tariffs. Even with consumer expectations still high (Michigan survey showed 7.3% inflation expectations for next year), the actual data suggests inflation is easing fast, not rising.
This set the stage for a classic “up market, down vol” move. VIX fell back under 18, and flows continued pushing prices higher as shorts got squeezed. But now we’re stepping into a short-term “window of weakness” post-May OpEx. A lot of those supportive flows—dealer hedging, CTAs, vol target funds—are fading, meaning markets might chop sideways or see a small pullback. Still, if nothing major breaks in the next two weeks and we hit that 6,000 mark, we’re likely setting up for new highs into summer. Sideways-up remains the base case, with short-term bumps possible—but not guaranteed.
One potential such bump was the Moody’s credit ratings downgrade on Friday. It pushed markets down on Mon open, but by the end of the day markets finished positive, as investors bought the dip. The bullish momentum is strong.
As for this week, we’ll get housing data for both new and existing sales, weekly jobless claims, and the S&P Global flash PMI—all key in gauging how solid the soft landing narrative really is. A number of Fed officials, including Vice Chair Jefferson and NY Fed’s John Williams, are also scheduled to speak, which could move markets if there’s any shift in tone on rate cuts.
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