The SPX was building on its momentum on Thursday and closed 1.5 percent higher at 3902.6 points, driven by growth stocks (+2%) and growth sensitive the semiconductor complex (SOX +4.5%).
While stocks and commodities (copper +3.5%, Bloomberg Commodity Index +4%) bounced back from their recent sell-off the yield curve (2s10s) stayed inverted (albeit barely so).
In general markets continue to be highly confused about which narrative they should play and the most important input variable (inflation) keeps oscillating in an ever widening band with an downside tilt.
Inflation expectations filter through to stocks via the bond market, which is becoming increasingly volatile as investors find it increasingly hard to price inflation correctly and place their orders, as the balance sheet of primary dealers is extremely scarce thanks to regulatory reasons (see chart below).
So now we not only have increasingly large swings in inflation expectations, but also amplified levels of bond market volatility due to less dealer capacity to absorb price shocks and provide liquidity.
This could become a big problem for stocks going forward, especially, if a recession should manifest more clearly.
Gamma improved further by 185M to -269M and the gamma inversion level at 3990 is becoming a real possibility now, if tomorrow's Nonfarm Payrolls don't disrupt the party.
Another factor that could lead to some turbulence could be the expiration of about 24 percent of total net gamma, mainly on the call side.
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