Despite a late rally, U.S. Equity Markets finished Wednesday lower, led by the 0.67% fall in the S&P. Markets saw a sizable pullback from the gains to start the week. Investors still believe that aggressive rate hikes are still in the global monetary policy pipeline. The New York Times reported no pushback from the Federal Reserve rate-setting members regarding a fourth 75-basis-point rate hike for this year in November. The Fed terminal rate shot up as a result – it now approaches 5% in 2023. Meanwhile, the latest edition of the Fed’s Beige Book shows economic conditions have improved modestly since its last report, but it still shows labour tightness and persistent pricing pressures. Manufacturing profitability is declining. It is hard to turn on a television and watch the news without hearing about inflation. It is hurting the wallets of households and businesses everywhere. As costs rise for things like gas and food, disposable income shrinks. So, individuals and companies will be more careful about when and where they spend their money. The change means fewer funds will be spent on finished goods like furniture or televisions, extending the replacement cycle, meaning items will last longer and require less frequent purchases. Yet, due to the depletion of raw material inventories related to COVID-19 demand and sanctions on Russia, costs for manufacturers have begun to creep back up after initially falling. This is happening as consumers are less willing to spend. So, earnings expectations likely need to come down as well. After all, margins are going to compress as companies spend more and consumers pay less. Now, that could create a hurdle for corporate America in the near term as they see the price-to-earnings (P/E) multiples on their shares drop. But over the long term, it makes the expectations bar for companies easier to overcome, which should act as a long-term tailwind for the S&P 500. On Monday, the Federal Reserve Bank of New York released its Empire State Manufacturing Survey for October. The overall number was weaker than expected, with an Index value of negative 9.1 compared with the expectation for negative 4.3 and September’s negative 1.5. It marked the first time since early 2020 that the gauge has maintained a negative reading for three straight months. The report is an indicator of regional business activity, but we want to pay attention to New York. It is the third-largest state behind California and Texas in terms of its contribution to the national Gross Domestic Product. The New York central bank sends questionnaires out to 200 regional manufacturing executives every month. They are asked about the state of current business in addition to the state of activity six months down the road. For October, shipments, number of employees, inventories, and delivery times all fell compared with September’s data. Meanwhile, the pace of decline in unfilled orders slowed and new orders held steady. But the numbers we care about most are prices paid and prices received… They are key measures of inflation growth. And they showed companies may be having more difficulty pushing through price increases. Prices paid is important because it tells us what manufacturers are paying to produce goods. We can think of it relative to the U.S. Bureau of Labour Statistics’ (“BLS”) Producer Price Index (“PPI”). In the October survey, prices paid saw a sharp rebound, meaning manufacturing costs rose. The October prices paid index had a reading of 48.6 compared with September’s 39.6 and April’s all-time high of 86.4. While this was the first rise in four months, it’s worth noting that September experienced the lowest reading since December 2020. The overall trend still remains lower at the moment. Prices received is an equally important reading. This measure tells us what companies are collecting for their finished goods, or what it’s costing individuals to buy something. The prices received index came in at 22.9 compared with September’s reading of 23.6 and March’s all-time high of 56.1. October’s reading is at the lowest level since January 2021 and points toward further weakness in the CPI. As I have said, both measures are leading indicators of the direction of inflation. The readings for prices paid and received have a tendency to peak before or right around the same time as the PPI and CPI. What is more, companies do not expect business conditions to improve in the next six months. The business outlook index fell from 8.2 to negative 1.8. Plus, they expect the cost of manufacturing goods to rise while prices received for those same items drop. So, the ability for companies to pass on cost increases to consumers – which has been possible so far – seems to be dwindling. This data would point to corporate profitability shrinking. From the end of 2016 until the start of the pandemic, the Empire State Manufacturing Survey’s prices paid index had an average value of 33 while the prices received index averaged 13.4. Monday’s readings tell us there is still more room to the downside, but we are steadily filling in the gap. Longer term, easing inflation growth is a trend money managers who are investing in the near future must see in order for them to become more optimistic about risk assets like stocks. They realise the outsized economic growth experienced during 2021 due to massive amounts of stimulus is unsustainable. Those big-money investors want to see economic activity revert back toward the mean. That way, they have less to worry about from a liquidity and Federal Reserve policy perspective. It took roughly 26 months for inflation to reach these levels, and it is going to take at least 12 months to notice a meaningful slowdown. But this is a step in the right direction. A sustainable move lower in cost growth will tell us the Fed can back off its aggressive rate-hike path moving forward. The central bank believes it should approach the point where it can pause rate hikes early next year. That way, Wall Street analysts can more easily predict what economic growth and earnings estimates will look like going forward. The change will make money managers more optimistic on the outlook for stocks. This in turn will act as a long-term tailwind for the S&P 500. Within the S&P 500 Index, 10 of 11 sectors finished lower. European Markets declined. Markets finished lower as sentiment continues to fall in macro news. Recession risks, underlying high inflation, and further central-bank tightening remain high on investors’ minds. U.K. inflation accelerated more than expected and returned to its 40-year high last seen in July of 10.1% year-over-year inflation. U.K. Chancellor Jeremy Hunt is examining a tax on bank profits and extending the windfall tax on oil and gas firms, while investors will be looking to third-quarter earnings season for the first signs of a recession. In Asia, the markets encountered choppy trading following an unsteady U.S. session. Hesitancy in yesterday’s trading reflected the uncertainty surrounding the economic outlook for the region, as China’s delayed data release is beginning to unsettle investors. Bank of Japan board member Seiji Adachi said there is a growing chance that upcoming inflation data for October may reach 2%. The Reserve Bank of Australia shows further proof in its Meeting Minutes that it is likely to break the mould of global central banks’ tightening policies. Finally, South Korea said exports are likely to weaken at a fast pace, as major economies’ growth starts to shrink. Elsewhere, Oil rose 3.69% while Gold closed lower by 1.31%.
To mark my 2650th issue of TraderNoble Daily Commentary I am offering a special 2-Year Rate of Euro 2750 for my Platinum Service which includes 1 to 4 updated emails throughout the trading day to demonstrate this value, a monthly subscription over the same period would cost 4440 euro in total This offer represents a 38% discount and is open to both new and existing members. If anyone is interested in this offer can you please email me on bryan@tradernoble.com for details
For anyone following my Platinum Service it made 681 points yesterday and is now ahead by 7428 points for October, after finishing September with an incredible gain of 6660 points, after closing August with a gain of 2228 points, having made 2660 points in July, following a gain of 3371 points in June. The Service made 3651 points in May, after making 762 points in April, following a gain of 5883 points in March. The Platinum Service made an impressive 5324 points in February, after ending January with a gain of 3878 points, more than making up for December’s 932 points loss. Since I started this New Platinum Service in June 2015 it has averaged a monthly gain of over 1600 points. I have a YouTube Channel which contains recent interviews I have given This can be viewed by clicking HERE Please subscribe to this for new interview notification
Equities
The S&P 500 closed 0.67% lower at a price of 3695.
The Dow Jones Industrial Average closed 99 points lower for a 0.33% loss at a price of 30,423.
The NASDAQ 100 closed 0.40% lower at a price of 11,103.
The Stoxx Europe 600 Index closed 0.34% higher.
This morning, the MSCI Asia Pacific Index fell 0.7%.
This morning, the Nikkei closed 0.92% lower at a price of 27,006.
Currencies
The Bloomberg Dollar Spot Index closed 0.4% higher.
The Euro closed 0.6% lower at $0.9772.
The British Pound closed 1.1% lower at 1.1213.
The Japanese Yen fell 0.6% closing at $149.87.
Bonds
Germany’s 10-year yield closed 6 basis points higher at 2.38%.
Britain’s 10-year yield closed 6 basis points lower at 3.88%.
US 10 Year Treasury closed 9 basis points higher at 4.12%.
Commodities
West Texas Intermediate crude closed 3.69% higher at $86.16 a barrel.
Gold closed 1.31% lower at $1628.10 an ounce.
This morning on the Economic Front we already had the release of German Producer Prices which rose 2.3% versus 1.3% M/M expected. Next, we have Euro-Zone Current Account at 9.00 am, followed by U.S. Weekly Jobless Claims and the Philly Fed Manufacturing Survey at 1.30 pm. Finally, at 3.00 pm Existing Home Sales will be released. Speaking wise: Fed Members Jefferson, Cook and Bowman are speaking at 6.30 pm, 6.45 pm and 7.05 pm respectively.
Cash S&P 500
A combination of a rising Dollar and Bond Yields hitting a new high for the year have led to the S&P trading 70 Handles lower from where I marked prices 24 hours ago. Not helping the bullish case are the negative headlines from Fed Members Kaskari and Bullard saying rates need to be higher to combat inflation. These are the same Members who said that inflation was transitory and no need to hike rates earlier this year. In my opinion these appointed officials have no clue and only adds to the uncertainty in the market. On the plus side the reported earnings over the past week have been strong while buybacks will begin next week. This should help underpin the S&P from aggressive losses going forward. Yesterday, my S&P plan worked well as after the market hit my 3704 buy level we had a nice rally to my 3722 T/P level and I am now flat. The S&P has support from 3642/3662 where I will be an aggressive buyer with a 3629 ‘’Closing Stop’’. I still do not want to be short the market at this time.
EUR/USD
The Euro traded lower to my .9800 buy level. I am still long and I will add to this position at .9730, while leaving my .9675 ‘’Closing Stop’’ unchanged.
March Dollar Index
No Change. I am still short at 108.90 with the same higher 111.20 exit level. Unfortunately, the Dollar just missed my exit level before rallying again overnight. If this level is triggered, I will be back with a new update for my Platinum Members. Given the huge points made this month, I will look to exit this trade by the end of next week at the latest.
Cash DAX
After the DAX hit my 12680 buy level, very late in the session we saw a quick 100 point rally. As I wanted to be flat overnight, I covered this position too early at 12715 and I am now flat. This morning, higher Bund Yields sees the DAX opening lower at 12680. We have support from 12480/12570 where I will again be an aggressive buyer with a wider 12395 ‘’Closing stop’’.
Cash FTSE
My FTSE plan worked well with the market hitting my 6895 buy level before rallying to my revised 6937 T/P level as emailed to my Platinum Members and I am now flat. I am surprised how well the FTSE is holding in given the political mess in the U.K. where it looks like if there is a snap-election the Conservatives may only come back as the third party. Remember a market that can fall on bad news has to be respected and is one of the main reasons why I have no interest in shorting the FTSE. Today, I will again be a buyer on any further dip to 6780/6860 with a 6725 ‘’Closing Stop’’.
Dow Rolling Contract
After the Dow traded lower to my 30300 buy level we saw a nice 200+point rally. Unfortunately, as I was nervous of Bond Yields hitting 4.12%, I covered this long position too early at a price of 30382 and I am still flat. Today, I will again be a buyer from 29950/30200 with a lower 29695 ‘’Closing Stop’’.
Cash NASDAQ 100
My NDX plan worked well with the market trading lower to my 11090 buy level before rallying to my 11210 T/P level and I am still flat. With tech earnings doing well so far I do not want to be a seller even though Treasury Yields show no sign of ending their relentless rise. The NDX has support from 10800/10950 where I will again be an aggressive buyer with a 10695 ‘’Closing Stop’’.
December BUND
The Bund has been kind to me over the past few weeks as the strategy of buying dips with not too aggressive T/P level targets has worked well. Yesterday, after the Bund hit my 135.95 buy level we rallied to my revised 136.47 T/P level and I am now flat. This morning, the Bund is selling off again, trading at 135.15 as I go to press. We are very near the lows of the year. The Bund is severely oversold, has support from 133.90/134.70 where I will again be an aggressive buyer with a wider 132.95 ‘’Closing Stop’’.
Gold Rolling Contract
Gold continues to trade heavy, having fallen over $80 in the past week. The world and his mother are long Gold and this is not helping the price action. Yesterday, after Gold hit my 1631 buy level I emailed my Platinum Members to exit any long position at 1636 and I am still flat. Gold has support from 1600/1615 where I will be a more aggressive buyer with a 1589 ‘’Closing Stop’’.
Silver Rolling Contract
No Change. I am still long at 20.05 the same 20.60 T/P level.
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