Wait and watch mode

US stocks are trading moderately higher Tuesday, even as Tech outperformance takes a bit of a hiatus for now. In that light, given the concentration risk at the index level with a handful Mega-Cap AI stalwarts constantly leading the rally charge of late, it's good news to see pro-cyclicals and positive economic responsive stocks rally.

But given the absence of macro news to guide investors, a serious lack of enterprise engulfed yesterday's session, so trader's order books were lean, and speculators could not muster up the courage to test S&P 500 weekly high-water mark.

And with the Fed in the blackout period and CPI looming, both of which are getting framed with a touch of policy uncertainty ringing in the background, investors appear to have moved into wait-and-watch mode.

Indeed, better growth and stubborn inflation could still warrant higher rates. So the glaring problem then hiding in plain sight is that the high valuations on both an absolute and relative basis likely limit the upside, especially if rates continue to grind higher.

Nonetheless, the outperformance of pro-cyclicals (Financials, Industrials, Materials) is lining up with a subtle move higher in 10-year US Treasury yields, suggesting, at least for now, growing confidence in the economic growth view. Last Friday's Payrolls release is still resonating. It supports and lends trust to the view that the US economy is chugging along reasonably robustly -- supported further by the dissipation of risks around the debt ceiling and stabilization on banking concerns.

Brent oil bounced off the $75 bbl level, widely acknowledged as the Saudi line in the sand, but the move higher was very much in line with the pro-cyclical rally in US stocks as recession angst eases with the dissipation of the debt ceiling and banking concerns. But like stocks, there is a limit oil traders will run with bull horns ahead of the Fed meeting.

Still, with traders hoping for additional policy support from China, they have dipped their toes again into the oil price downward slicks.

Despite solid oil demand globally, we are 2 million barrels per day behind lofty expectations in China that are required to push oil above $85-90. While at the same time, traders do not believe other OPEC members are seeing eye to eye with Saudi Arabia's "whatever it takes a moment," so there could be compliant issues down the road.

With policy implications for G 10 central banks becoming somewhat limited, FX traders are waiting for one of the two primary challengers, the EUR or CNH, to step up and take on the dollar.

In the meantime, FX punters will likely focus on some of the lesser G-10 pairs after a surprising RBA hike. Once again, the RBA displayed that they are very sensitive to the data flow between meetings. Specifically, the statement turned more concerned about domestic and overseas inflation and acknowledged the rebound in house prices. Over the last two meetings, market pricing has not fully reflected the strength of recent data, and this may create tactical opportunities around future RBA meetings.

In Asia FX, everyone is looking to the PBoC to right the ship. From a historical downtrodden economic episode perspective, it is time for the PBoC to come through, as business and consumer expectations will weaken further without policy support.

German factory orders edged down slightly further after a very sharp drop in March. They were weaker than consensus expectations, which were looking for some small payback for March gloom, And consumer inflation expectations' decreased significantly' according to the ECB. All of this leads one to conclude the market is still pricing too much policy divergence between the ECB and the FED.

But it is getting boring selling the EUR as the street thinks there is a risk that European sentiment will soon improve and for core disinflation to only be gradual.

Bank of Canada is in focus today, where Governor Tiff is holding his cards close to his chest, apparently comfortable going into a meeting without its rate decision telegraphed. Although I wonder why post-meeting vol is so low as, at a minimum, we could be in for a "hawkish hold ."Although a surprise rate hike would kickstart the FX markets as it would stand out in the context of the Fed's pre-signalled June pause.

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