Following another volatile trading session U.S. Equity Markets finished Thursday lower led by the 0.80% fall in the S&P. Despite the aggressive sell-off from mid-afternoon highs, the VIX also closed lower by 2.6% at a price of 29.98. Markets encountered a multitude of factors that influenced trading. Investors still believe that aggressive rate hikes are in the global monetary policy pipeline with the Federal Reserve implied terminal rate breaching the 5.00% mark. Hawkish Fed speak continues to focus on the lack of sustained progress on inflation. Economic data continues to provide little direction with Initial Jobless Claims inching slightly lower, while the October Philly Fed Index missed expectations as prices paid rose for the first time in four months. Core PCE growth may remain stubbornly high. Right now, it is almost impossible to look at swings in the stock market and not think about whether inflation is growing or easing. Every day, it seems like there is a new indicator telling us something new about prices. But the biggest driver of inflation is shelter. It makes up roughly one-third of the Bureau of Labour Statistics’ Consumer Price Index (“CPI”). And owners’ equivalent rent (“OER”) – basically how much you would pay to rent your own home – makes up just under 24% of the index. So, we want to pay close attention to any shelter-related gauges that can give us clues about the direction of underlying inflation growth. One such measure is government-sponsored mortgage finance provider Fannie Mae’s Home Purchase Sentiment Index (“HPSI”). And recent data indicate rental price expectations rebounded in September. That means demand remains high, likely supporting sustained OER growth in the near term. It could also mean that the Bureau of Economic Analysis’ core PCE growth will fail to ease when the numbers are released next week. This would weigh on the near-term outlook for the S&P 500 Index. Every month, Fannie Mae asks 1,000 U.S. consumers to answer 100 survey questions on a wide range of housing-related topics. Participants are polled about owning and renting a home, home and rental price changes, the economy, household finances, and overall consumer confidence. The results are used to form the HPSI. The measure is then broken down into rental-price and home-price subindexes. The two have moved closely together over the past five years. In September, the rental price change expectation was 6.2% year over year – up from the 5.7% jump in August. In other words, the poll is forecasting rising rental prices. OER appears to lag the Fannie Mae rental price change expectations numbers, implying that it could take some time before OER starts to roll over and weigh on inflation growth. As I discussed earlier this month, the number of multifamily rental units under construction has exploded higher – a delayed response to pandemic-driven demand. However, much of that supply is not going to hit the market until next year. According to commercial real estate information provider CoStar, it is expected to come online in early 2023. Fannie Mae said this will push vacancy rates higher and rental rates down. In the meantime, until that supply is realised, rental prices may hold up. After all, if buyers think home prices are falling, they will likely want to wait and see if prices drop further before taking the plunge. This could mean the Bureau of Economic Analysis’ core PCE numbers next week may disappoint expectations for 5.2% growth, simply because they are not slowing down. Remember, those numbers will be the last real piece of inflation data the Federal Reserve sees before it holds its monetary-policy meeting in early November. Persistently high inflation all but guarantees a 75-basis-point rate hike and could skew the outlook for the December meeting toward another such increase. If that proves to be the case, it could weigh on the near-term outlook for the S&P 500, with investors worrying that rising rates will hurt household and business disposable income. That, in turn, would hurt the potential for global and domestic economic growth. Within the S&P 500 Index, eight of 11 sectors finished lower. European Markets closed mixed. Markets finished mixed as U.K. assets encountered a volatile trading day following Prime Minister Liz Truss’ resignation. The Bank of England’s Ben Broadbent says there is a clear justification for tighter monetary policy. Europe remains focused on the energy crisis as the two-day European Union Council meeting starts. The energy price cap will be among many topics discussed. Meanwhile, German Producer Prices surged to new record highs in September as inflationary pressures become increasingly entrenched. In Asia, the markets ended a volatile trading day mostly lower. Sentiment soured due to renewed fears over inflation and the continuing debate over the validity of recent bounces in the market. Japan’s Trade Deficit was smaller than expected with exports beating estimates. Australia’s job report showed employment growth stalled. Authorities from Beijing again tightened COVID-19 restrictions as cases begin to climb again, while the Bank of Indonesia raised its benchmark interest rate by 50-basis points. Elsewhere, Oil closed 0.19% higher while Gold fell a further 0.13% after a volatile session.
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Equities
The S&P 500 closed 0.80% lower at a price of 3665.
The Dow Jones Industrial Average closed 90 points lower for a 0.30% loss at a price of 30,333.
The NASDAQ 100 closed 0.51% lower at a price of 11,046.
The Stoxx Europe 600 Index closed 0.25% higher.
This morning, the MSCI Asia Pacific Index fell 0.8%.
This morning, the Nikkei closed 0.42% lower at a price of 26,893.
Currencies
The Bloomberg Dollar Spot Index closed 0.4% higher.
The Euro closed 0.1% higher at $0.9789.
The British Pound closed 0.1% lower at 1.1208.
The Japanese Yen fell 0.2% closing at $150.20.
Bonds
Germany’s 10-year yield closed 2 basis points higher at 2.40%.
Britain’s 10-year yield closed 3 basis points higher at 3.91%.
US 10 Year Treasury closed 12 basis points higher at 4.24%.
Commodities
West Texas Intermediate crude closed 0.19% higher at $86.32 a barrel.
Gold closed 0.19% lower at $1625.10 an ounce.
This morning on the Economic Front we already had the release of U.K September Retail Sales which fell 1.4% versus -0.5% expected. Next, we have Euro-Zone Consumer Confidence at 3.00 pm. We have no U.S. Data today. However, Fed Member Williams is speaking at 2.10 pm
Cash S&P 500
There is no doubt that we are living in a trading environment that is trying to cause the most pain for bulls and bears alike. Yesterday after the S&P hit an afternoon high at 3735 it looked like we were going to test the 3765 highs from Tuesday before the market reversed, hitting an overnight low so far at 3645 in what turned out to be another brutal sell-off. 10 Year Treasuries after rising for an unprecedented 12 weeks in a row are now testing the 2008 highs, closing last night at 4.24%. The Daily chart for Treasuries in unstainable given this vertical move and incompatible with a soft landing. The fact that the S&P has not made new lows is something to be respected. Adding to the bearish tone is the fact that out of the last nine Fridays’-8 have closed lower and some of these Friday moves have been brutal. If the Fed do not back off and the let the rate hikes to date filter through the system they will cause a major recession. The Global Fiscal mess is accelerating. We saw some of this on Wednesday when it was announced that the U.K. Treasury now has to pay the Bank of England 12 Billion Pounds to pay for losses on QE. You just can’t make this up but it accentuates the Fiscal difficulties governments face and they are real. Late in yesterday’s session the S&P hit my but level at 3660. We did have a small 15 Handle rally but as I wanted to be flat overnight, I covered this position at 3665. The S&P has support from 3620/3640 where I will again be a small buyer with a tight 3609 Fixed Stop. I still do not want to be short the market at this time.
EUR/USD
No Change. I am still long at .9800 and I will continue to 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
I am still flat as the DAX traded in a narrow range yesterday. I will continue to be a buyer on any dip lower to 12470/12560 with the same wider 12395 ‘’Closing stop’’.
Cash FTSE
No Change. Despite the worsening political mess in the UK leading to the resignation of another Prime Minister, the FTSE could not trade lower. 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 6780/6850 with a 6725 ‘’Closing Stop’’.
Dow Rolling Contract
The Dow just missed my initial 30200 buy level by 20 points before rallying small to sit at 30325 as I go to press. Ahead of the weekend I will now lower my buy level to 29900/30150 while leaving my 29695 ‘’Closing Stop’’ unchanged.
Cash NASDAQ 100
Weaker than expected earnings from Snap and Whirlpool saw the NDX hit my 10950 buy level overnight. I am still long with a now lower 11020 T/P level. I will add to this position at 10800 while leaving my 10695 ‘’Closing Stop’’ unchanged. If any of the above levels are hit I will be back with a new update for my Platinum Members.
December BUND
This morning the Bund opened in yesterday’s buy range. I am now long at 134.55. I will add to this position at 133.75 while leaving my 132.95 ‘’Closing Stop’’ unchanged. I will have a T/P level at 135.35 and if any of the above levels are hit I will be back with a new update for my Platinum Members.
Gold Rolling Contract
Gold continues to trade heavy, having fallen over $80 in the past week. Gold did rally to an afternoon high at 1645 before selling off into the New York close. I will continue to be a buyer on any further dip lower to 1598/1611 with the same 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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