Week of Mar 30 2025

The economy is showing stagflationary signals with core PCE at 0.4% month-over-month (double the Fed's target) and weak consumer spending at 0.1%. This has led to reduced Q1 GDP estimates of 0.7% and fewer expected Fed rate cuts. Corporate earnings forecasts for Q1 2025 have been lowered from 11.6% to 7.1%, though tech remains resilient while Materials and Consumer Discretionary sectors face pressure. The labor market remains surprisingly strong with historically low private sector layoffs, despite consumer confidence dropping to its lowest level in 12 years.

Market positioning shows extreme bearish sentiment, with BofA data indicating heavy CTA short positions (SPX -43%, NDX -64%, Russell 2000 -93%) and significant U.S. equity outflows ($20.3bn) contrasting with European inflows ($3.1bn). This regional rebalancing reflects a shift from U.S. "Fiscal Contractionists" to European/Chinese "Fiscal Expansionists". The technical structure is particularly vulnerable due to collapsing gamma exposure (SPX gamma at -$0.2B, 8th percentile), creating conditions for accelerated moves in either direction. Notable is the extreme asymmetry in positioning, with remarkably low fear of upside risk as evidenced by SPX call skew at the 6th percentile.

The left-tail risk scenario centers on a full correction (>10% from highs) looms if tariffs escalate and NFP confirms labor weakness, pushing the SPX below 5500 toward 5000. Sustained realized volatility expansion could lift VIX toward 2022 levels (high 20s/low 30s), though current positioning suggests a slower burn than a crash. The right-tail scenario depends on a benign tariff outcome and strong NFP could trigger a relief bounce, potentially reclaiming 5740. However, the lack of upside hedging (low call skew last week) limits a explosive rally unless VRP spikes and vol sellers retreat, possibly capping gains below 6200.

Week 14 brings several critical catalysts: Monday's quarter-end rebalancing and PS collar reset (approximately $4.5 billion for sale at market close); Tuesday's ISM Manufacturing PMI and speech from ECB President Lagarde; Wednesday's "Liberation Day" tariff announcement coinciding with ADP employment data and Eurozone inflation figures; Thursday's ISM Services PMI; and Friday's definitive conclusion with Nonfarm Payrolls report and speech from Fed Chair Powell.