U.S. Equity Markets finished yesterday’s session lower, led by the 1.17% fall in the NASDAQ 100. Markets were lower as equities continue to feel the fallout from a hawkish Federal Reserve. The Fed’s economic projection now calls for a year-end median target rate of 4.4% – a full 1.0% higher than June’s projection. Chairman Jerome Powell reiterated his stance that sustained below-trend economic growth is required for price stability and warned that loosening policy too soon would be a mistake. Meanwhile, U.S. weekly Initial Jobless Claims came in below consensus, remaining near their lowest levels since May. Prepare for more economic pain. That was the message from Federal Reserve Chairman Jerome Powell on Wednesday evening. He reiterated that the central bank is strongly committed to bringing inflation back down to its 2% goal. Powell said the Fed is purposefully moving interest rates to a level it believes will weigh on inflation growth. But he stated with Wednesday’s adjustment that interest rates are at the lowest end of the range where it would consider pausing hikes. The central bank chief noted that activity in the housing sector has weakened significantly due to rising mortgage rates. Powell also said job growth is starting to cool with the number of quits falling and job openings starting to decline. Yet, policymakers want to see broader trends develop in these two areas, balancing out the supply and demand outlooks. Powell stated that he wished there were a painless way to accomplish these objectives. He noted a lack of action now will lead to a worse outcome later. So, the Fed remains intent on getting the real Federal-Funds rate back to positive territory and out of the current negative level. And while that may not be the quick-fix answer investors want to hear, it should promote longer-term price stability and economic growth. The change should support a longer-term rally in the S&P 500 Index. In its two-day meeting, the interest-rate-setting Federal Open Market Committee (“FOMC”) raised the Federal-Funds rate by another 0.75%, similar to the decisions made in June and July. This increased the Federal-Funds target from a range of 2.25% to 2.50% to a new range of 3.00% to 3.25%. And according to the FOMC, this will be appropriate for additional raises going forward, given the employment and economic pictures. As part of its quarterly Summary of Economic Projections (“SEP”) release, the central bank raised its outlook for interest rates once more. Policymakers forecast rates will end the year at around 4.4%, compared with their June forecast of 3.4%. However, the pace of the increase slowed compared with the 1.5% forecast increase between March and June. For 2023, the Fed guided for interest rates of 4.6% compared with the prior 3.8% projection. And it forecast interest rates at 3.9% in 2024 compared with the previous guidance of 3.4%. Those changes compare with increases of 1% and 0.6%, respectively, in the June SEP. For 2025, the Fed anticipates interest rates of 2.9%. The FOMC left its projection for longer-run interest rates unchanged at 2.5%. Based on that guidance, policymakers have now achieved another near-term goal of getting interest rates above the neutral level so they can begin to weigh on inflation growth. The implication is that the Fed will have two more meetings in November and December to raise rates by another 1.25%. That means a rate increase of 0.75% is likely in November, with a 0.50% hike in December. Federal Reserve officials now expect economic growth for this year and next to run well below trend. The group lowered its 2022 economic growth forecast from 1.7% to 0.2%. For 2023, they lowered their prior expectation from 1.7% to 1.2%. Powell has said this will be necessary for inflation growth to slow and for the central bank to even consider easing up on rate increases. The central bank expects inflation growth to slow to its 2% objective by 2025. The pace of future rate increases continues will depend upon the incoming data. But Powell noted that as rates continue to increase going forward, it will eventually be necessary to stop rate hikes and study the impact on the economy. As I noted above, Powell wants to see the real Federal-Funds rate turn positive before ending this hiking cycle. Based on today’s numbers, the real Fed-Funds rate is about -5% – so there is still some room to go. Within the S&P 500, nine of the 11 sectors finished lower. European Markets closed lower. The early sell-off was driven by the Fed’s Wednesday rate hike. Later in the day, the Bank of England raised rates by 50 bps, also warning that further rate hikes would ensue. The European Central Bank’s Isabel Schnabel said that Germany could suffer a recession due to its heavy reliance on the now-dwindling Russian gas supply. She also estimated that high inflation could last until 2024. Switzerland and Norway’s central banks both raised rates by 75 bps and 50 bps, respectively. In Asia, Investors’ reaction to the Fed’s rate hike of 75 basis points (“bps”) on Wednesday weighed on equities. The Yen suffered losses as the Bank of Japan reiterated its dovish stance on rate policy but later rebounded as Japan confirmed its first policy intervention since 1998. Elsewhere, the People’s Bank of China continued to set strong fixing points, propping up the yuan. And the central banks of Taiwan, Indonesia, and the Philippines all raised their interest rates on Thursday. Elsewhere, Oil closed 0.66% higher while Gold closed flat.
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Equities
The S&P 500 closed 0.84% lower at a price of 3757.
The Dow Jones Industrial Average closed 107 points lower for a 0.35% loss at a price of 30,076.
The NASDAQ 100 closed 1.17% lower at a price of 11,501
The Stoxx Europe 600 Index closed 1.83% lower.
Yesterday, the MSCI Asia Pacific Index fell 0.8%.
Yesterday, the Nikkei closed 0.58% lower at a price of 27,153.
Currencies
The Bloomberg Dollar Spot Index closed 0.4% lower.
The Euro closed 0.1% lower at $0.9840.
The British Pound closed 0.2% lower at 1.1255.
The Japanese Yen rose 1.4% closing at $142.40.
Bonds
Germany’s 10-year yield closed 8 basis points higher at 1.96%.
Britain’s 10-year yield closed 19 basis points higher at 3.31%.
US 10 Year Treasury closed 17 basis points lower at 3.70%.
Commodities
West Texas Intermediate crude closed 0.66% higher at $82.45 a barrel.
Gold closed 0.1% higher at $1676.10 an ounce.
This morning on the Economic Front we have German, Euro-Zone, U.K. and U.S. Global Composite PMI at 8.30 am, 9.00 am, 9.30 am and 2.45 pm respectively. Finally, we have a speech from Fed Chairman at 7.00 pm.
Cash S&P 500
Yesterday’s session achieved nothing as a classical psychology shakeout that makes everyone question what can go wrong. Three things continue to surprise me.
1) That there is so far still no reversal in Bond Yields as the vertical charts become ever more ridiculous. Despite this fact we still don’t have new lows which is odd yet shows how oversold the Equity Charts are at this stage.
2) The VIX still can’t rally especially when $NYMO hit over -90 during yesterday’s session.
3) The continued strength in the Dollar despite the BoJ intervention yesterday morning. This was the first time the BoJ have intervened since the LTCM Debt Crisis in 1998. Central Bank intervention is rare and if the ECB join the party then finally, we will get a weaker Dollar which in turn will support a melt-up in the S&P. If the BoJ wants to be taken seriously then I suspect they will have to step in again perhaps this morning?
Yesterday, my latest 3751 long S&P position worked well with the market trading higher to my 3780 T/P level and I am now flat. I have never seen more oversold readings in the S&P. Last night, the McClellan Oscillator closed at – 303. This is one of the most negative readings in history. Remember a reading great than -250 results in a 5/10% rally in the S&P as we saw in early September. The S&P has support from 3725/3745 where I will again be an aggressive buyer with a 3699 wider ‘’Closing Stop’’.
EUR/USD
I am certainly wrong on my 1.0060 long Euro position. Given the number of points made this month, I will continue to hold this position with no stop or T/P level for now.
March Dollar Index
Despite the BoJ intervention, the Dollar managed to close higher yesterday. I am still short at an average rate of 108.90 with the same 108.10 T/P level.
Cash DAX
No Change. I am still a buyer from 12410/12510 with the same 12295 ‘’Closing Stop’’.
Cash FTSE
No Change. I am still buyer on any dip lower to 7060/7120 with the same 6995 wider stop.
Dow Rolling Contract
With the Dollar up by 25% since January we are seeing no currency stability. Although currency interventions can fail, over time they tend to have an affect. As I have said countless times over the past few weeks, the world needs a weaker Dollar. This of course will drive the Dow higher. I am still flat the Dow as the market just fell shy of yesterday’s buy range. With the MO printing at -303, I will now raise my Dow buy level to 29780/29980 with the same 29595 wider ‘’Closing Stop’’.
Cash NASDAQ 100
I am still flat. I will now raise my buy level to 11320/11470 while leaving my 11285 ‘’Closing Stop’’ unchanged.
December BUND
Thankfully, the Bund rallied yesterday morning to my 141.80 T/P level before trading lower for the rest of the session and I am still flat. The vertical move higher in Bund yields in not sustainable especially with the level of debt in the system. The Bund has support from 138.90.139.60 where I will an aggressive buyer with a lower 137.95 ‘’Closing Stop’’..
Gold Rolling Contract
I am still flat. I am impressed that Gold closed higher despite the late sell-off in equity markets. I will now raise my buy level to 1640/1655 with a higher 1629 ‘’Closing Stop’’.
Silver Rolling Contract
Silver sold off to my 19.30 buy level. I am still long with no stop and the same T/P level at 19.90.
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