Following a quiet trading session U.S. Equity Markets finished Wednesday lower as both the S&P and NASDAQ 100 fell for a sixth consecutive day. Despite the negativity, the VIX actually closed lower on the day. Markets fell after fluctuating for most of the day, as investors searched for direction following a hotter-than-expected headline Producer Price Index (“PPI”) for September. The index rose 0.4% month-over-month, compared with the consensus of 0.1%. However, core PPI was in line with expectations. The Minutes of the central bank’s most recent policy meeting showed members remain concerned by persistently high inflation growth. They said higher interest rates have not produced much of a response on economic activity or cost growth, supporting additional rate hikes. This afternoon’s September Consumer Price Index (“CPI”) figure will serve as the main catalyst for a potential fourth 75-basis-point rate hike this year at the Federal Reserve’s November 1-2 meeting. Meanwhile earnings season kicks off tomorrow, with major banks reporting. Investors fear that 2023 estimates will see sizeable downward revisions. The stock market narrative is quickly switching from inflation to growth worries On Monday and Tuesday , I discussed the Federal Reserve’s intentions to raise interest rates. Policymakers like Governor Christopher Waller and Federal Reserve Bank of Chicago President Charles Evans have said they are shooting for a Federal-Funds target rate of 4.25% to 4.50 by year’s end – no matter what the economic data tell them. After all, the central bank is trying to get inflation growth to come back down. The U.S. Census Bureau’s Consumer Price Index (“CPI”) reading for August showed prices were up 8.3% compared with a year ago. The September data due today is expected to fall to 8.1%, but that is still near a four-decade high. However, the Fed has told us it will take six to eight months before the economic fallout from rate hikes starts to materialise. On Monday, Federal Reserve Vice Chair Lael Brainard said that we are only now beginning to see changes related to policy decisions made this past spring. So, we have yet to experience the damage from the 2.25% worth of rate increases from the June, July, and September Federal Open Market Committee meetings. In other words, if the central bank does not heed its own advice and dial back its aggressive rate-hike path, the economic pain will grow even worse. That will weigh on the near-term outlook for the economy and the S&P 500 Index. If we want to get a real-time idea of institutional investors’ growth expectations, take a look at a couple of key commodities. Behind Iron and Aluminum, Copper is the third most widely used metal in the world. It is employed in the construction, automobile, and machine-manufacturing industries – all areas of high growth. So, Wall Street views copper prices as a statement of the global growth outlook. When copper prices rise, it tells money managers that demand for the metal is high, meaning companies are building and expanding. Conversely, when the price of copper falls, it tells institutional investors that demand is low, meaning business activity is likely contracting. Looking at the Daily Chart we can see copper has been under steady pressure since the start of the year. In fact, the metal is off around 30% from the recent high set in March. The last time we experienced such a sell-off was between January and April 2020, when prices fell by about 26%. In the run-up to the financial crisis of 2008 to 2009, copper prices plunged by around 64%. But this is not the only commodity telling us growth concerns are rising. Oil is another key resource watched by Wall Street for signs of an expanding or contracting economy. Individuals use gas to travel to work, go on vacation, and pick up groceries from the store. And trains, trucks, planes, and ships carrying people and goods all around the world depend on fuel made through the oil-refinement process. Oceangoing vessels are the preferred source of transport when international trade is strong and goods are flowing around the world. It may be a slow way of moving containers, but it is cost-effective, while those ships use marine heavy fuel oil to get them where they need to go. So, when oil prices are rising, economic activity is increasing. But when oil prices fall, it is usually a sign of slowing economic demand. Oil prices have moved steadily lower since the recent high made in March. In fact, the WTI is off by over 28% since then. Keep in mind, the recent jump in oil prices stemmed from OPEC and its allies’ announcement last week to reduce oil production. However, prices have started to roll over once more. Now, those member countries typically employ such tactics for one reason. They are seeing demand drop. By reducing supply, OPEC members are hoping to support prices. But what they have really done is signal the global economy is weakening. And by the time they employ such measures, it is usually too late. Now the ball is squarely in the Fed’s court. Chairman Jerome Powell has told us the central bank is going to try and kill economic growth. The Fed wants to see below-trend output for some time to get price growth back below its 2% target on a sustainable basis. On Tuesday, Cleveland Fed President Loretta Mester said that monetary policy has not been aggressive enough relative to inflation. She said interest rates need to be more restrictive and suggested inflation may not hit the Fed’s 2% goal until 2025. She elaborated that it will require weak economic output to get there. Bear in mind, the U.S. Bureau of Economic Analysis’ average Gross Domestic Product growth for the decade prior to the pandemic was 2.3%. That is a long way from the 5.7% GDP growth experienced last year. And based on what these two important policymakers are saying, it is highly unlikely we will see a repeat of last year’s number or the decade prior any time soon. So, until we see or hear otherwise, we must assume policymakers intend to plod forward with their interest-rate plans. Until the central bank dials back its rate-hike policy, the shorts are likely to press their bets. They know the Fed is not listening or paying attention to the damage it is inflicting on the domestic and global economies. Within the S&P 500 Index, seven of 11 sectors finished lower. European Markets declined yesterday. Markets finished lower again as financial stability risks are beginning to entrench themselves into the region’s economic outlook. The U.K. and Bank of England’s policy movement remains under the microscope as the agency attempts to stabilise rising inflation amid a low-growth environment. Fuelled by growing concern that the Fed is nowhere close to significantly slowing its rate hikes, central banks continue to ramp up their monetary policy tightening, including the European Central Bank (“ECB”), which could prolong its rate hikes. And the ECB’s François Villeroy said that the central bank is considering shrinking the balance sheet as they near a 2% interest rate. In Asia, the markets were choppy as investors await U.S. inflation data. Investors will be looking for signs from the U.S. PPI for indications on the CPI that will be released Thursday. The Bank of Korea hiked rates 50 basis points above its neutral rate to 3.00%, as expected. Officials at the Bank of Japan remain vigilant as the Yen falls to a 24-year low against the Dollar. There is growing sentiment that the rapid decline could prompt another intervention. Plus, Japanese machinery orders were weaker than expected. Elsewhere, Oil fell 2.57% while Gold rose 0.47% despite the Dollar being strong.
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Equities
The S&P 500 closed 0.33% lower at a price of 3577.
The Dow Jones Industrial Average closed 28 points higher for a 0.10% loss at a price of 29,210.
The NASDAQ 100 closed 0.06% lower at a price of 10,785.
The Stoxx Europe 600 Index closed 0.42% lower.
This morning, the MSCI Asia Pacific Index rose 0.2%.
This morning, the Nikkei closed 059% lower at a price of 26,240.
Currencies
The Bloomberg Dollar Spot Index closed 0.2% higher.
The Euro closed 0.2% higher at $0.9718.
The British Pound closed 0.2% lower at 1.1015.
The Japanese Yen fell 0.3% closing at $146.10.
Bonds
Germany’s 10-year yield closed 3 basis points higher at 2.36%.
Britain’s 10-year yield closed 17 basis points higher at 4.61%.
US 10 Year Treasury closed 1 basis points higher at 3.93%.
Commodities
West Texas Intermediate crude closed 2.57% lower at $86.70 a barrel.
Gold closed 0.47% higher at $1671.10 an ounce.
This morning on the Economic Front we already had the release of German Final CPI which rose 10% Y/Y as expected. Next, we have the Bank of England Credit Conditions Survey at 9.30 am, followed by BoE Member Mann speaking at 12.00 pm. Finally, at 1.30 pm we have CPI and the Weekly Jobless Claims.
Cash S&P 500
Following a disappointing PPI Report the S&P chopped in a tight range before again selling off into the close. The Weekly 200 MA still matters as it continues to hold sell-offs for now. I am encouraged that despite the awful macro backdrop that the S&P has not flushed further. I am seeing massive positive divergences across the board. The $NYSI is at levels that have produced massive rallies before and is probably the main reason that when I look at this chart especially on a Monthly timeframe you have to be long. All eyes will be on the CPI print at 1.30 pm. Last month the S&P was trading at 4155 ahead of the September release. With the S&P trading nearly 600 handles lower this morning you got to feel most of the bad news is priced into the market. If we get a ‘’7 Handle’’ then the S&P should soar. However, an’’8 Handle’’ and we will probably test my 3493/3530 target level where I will continue to be an aggressive buyer. Yesterday, my S&P plan worked well with the market trading lower to my 3578 buy level before rallying to my 3605 T/P level and I am now flat. Today, I will be a buyer from 3540/3560 with a 3529 ‘’Closing Stop’’.
EUR/USD
Weaker equity markets saw the Euro traded lower to my .9690 buy level. I am still long and I will add to this position at .9620 while leaving my .9585 ‘’Closing Stop’’ unchanged.
March Dollar Index
No Change. I am still short at 108.90 with a now higher 110.85 exit level. If this level is triggered, I will be back with a new update for my Platinum Members.
Cash DAX
Shortly after I posted the DAX traded lower to my 12110 buy level before rallying to my 12195 T/P level and I am still flat. This morning, the DAX is trading at 12140. We have support from 11970/12070 where I will be an aggressive buyer with a 11875‘’Closing Stop’’.
Cash FTSE
This volatility in Gilts saw the FTSE again trade heavy. The FTSE sold off to my second buy level at 6815 for a now 6850 average long position. I will leave my 6775 ‘’Closing Stop’’ unchanged while lowering my T/P level to 6895.
Dow Rolling Contract
My Dow plan again worked well with the market trading lower to my 29140 buy level before rallying to my revised 29335 T/P level and I am now flat. The Dow continues to outperform both the NDX and S&P on this latest move lower. Any stability in the market should see the Dow rally given how oversold the Dow is. Last month the Dow was trading at 32600 ahead of the September CPI release so a lot of bad news is already priced into the market. The Dow has short-term support from 28850/29100 where I will again be an aggressive buyer with a with a lower 28595 ‘’Closing Stop’’.
Cash NASDAQ 100
The latest weakness in the NDX saw the market hit my 10800 buy level. I am still long and I will add to this position at 10650 with a now lower 10495 ‘’Closing Stop’’. I will have a T/P level at 10950 and if any of the above levels are hit, I will be back with a new update for my Platinum Members.
December BUND
My Bund plan worked well with the market trading lower to my 135.35 buy level before rallying over 100 points. As I want to continue to bank points when available I covered this position at my revised 135.85 T/P level and I am still flat. With 10 – Year Treasuries trying to put in a Double Top we may be close to a more meaningful rally in Bond Markets after this year’s rout. Today, I will again be a buyer of the Bund from 134.90/135.60 with the same 133.95 ‘’Closing Stop’’.
Gold Rolling Contract
I am still flat. As I am long Silver, I will now lower my Gold buy level to 1637/1652 with a lower 1625 ‘’Closing Stop’’.
Silver Rolling Contract
No Change. I am still long Silver at an average rate of 20.05 with the same no stop strategy. I will leave my T/P level unchanged at 20.60.
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