U.S. Equity Markets closed lower led by the 1% fall in the NASDAQ 100. Markets had reversed earlier losses before traders hit the sell button in the last hour of trading. The Philly Fed Manufacturing posted better-than-expected figures as new orders and shipments both slightly improved. The prices paid component fell to its lowest level since August 2020. The state of the housing market remains uncertain from higher interest rates, low builder confidence, and low consumer demand, while Jobless Claims for the week came in at 190,000, the lowest level since the week of September 23, 2022. Fedspeak remains bullish on the “raise and hold” narrative, despite the building momentum among Fed officials who are acknowledging that rate hikes may ending sooner than later. The U.S. Department of Treasury announced it has begun taking extraordinary measures after hitting the borrowing limit. U.S. mortgage rates dropped to 6.15%, the lowest level since September 2022. Capital One Financial (COF) announced more than a thousand layoffs in its department. Inflation growth is quickly slowing. Last week, the BLS released its December CPI data. The index rose 6.5% year over year (“YOY”) compared with the prior month’s 7.1% gain. On a month-over-month (“MOM”) basis, the CPI fell 0.1% compared with a 0.1% increase in November. December marked the sixth consecutive month where the annual CPI number has remained below its June peak. It is also the lowest YOY reading since October 2021. Even more, if we annualise the MOM number, inflation will contract by 1.2% over the next 12 months. But if we look at the three-month average of change, cost increases would annualise out to a 1.6% gain. Both of those numbers are well below the Federal Reserve’s 2% target. This should give the central bank room to stop raising interest rates going forward. The inflation projection models imply it could hit the pause button on rate hikes sooner than later. That would be a tailwind for stock and bond investors. So, what exactly could this change in Fed policy look like? Well, let us take a look at the progress made with regard to the real Fed-Funds rate. This rate is derived from current interest rates minus the CPI’s annualised growth. Note that the “real Fed-Funds rate” is a bit different from the “Fed-Funds rate.” The latter is the rate set by the Federal Open Market Committee as a guide for overnight lending rates between U.S. banks. The real Fed-Funds rate takes it a step further by factoring in the damage done by rising costs. In past rate-hike cycles, the Fed has sought to keep raising interest rates until the real Fed-Funds rate turns positive. That is the plan this time, too. In other words, from the peak in March, when the central bank first started raising interest rates, to now, the real Fed-Funds rate has dropped by 6%. While it’s still negative, that is a massive move. The next question becomes, when can it return to positive territory? I modelled different projections based on MOM inflation-growth trajectories. Prior to the pandemic, the average growth rate was 0.1%, while ever since it has been 0.4%. Since last June, the monthly rate has seen a 0.2% increase. As a result, I think the most likely outcomes from a sustainable monthly growth rate are between 0.2% and 0.3%. Based on updated models, I can see a positive real Fed-Funds rate in March. Before the CPI reading was released, this hyper-inflation growth scenario had the real Fed-Funds rate turning positive in June and only staying positive for two months. Now, it would turn positive in March and stay positive for the next eight months. This is important as it relates to the mindset of retail and institutional investors. It tells them that the Fed is rapidly approaching its goal of a positive real Fed-Funds rate even in the worst-case scenario. Once that happens, it can pause rate hikes, and then even start lowering them eventually. So, investors seeking to cash in on peak interest rates will clamour to buy assets such as U.S. Treasurys and stocks that offer high yields. In other words, they will start to put some money to work, while also looking to buy more aggressively once they sense rate hikes are done and the Fed has not crashed the economy. Within the S&P 500 Index, eight of the 11 sectors finished lower. European Markets got hit hard yesterday, led by the 1.86% fall in the French CAC. Bank of England Chief Andrew Bailey said that two months of declining headline inflation signals that cost pressures are easing despite a tight labour market. December Minutes from the European Central Bank’s (“ECB”) policy meeting showed that many officials were initially supportive of another 75-basis-point rate hike before agreeing to reduce it to only 50 basis points. ECB’s board member Klaas Knot said that there are multiple 50-basis-point rate hikes to come as inflation remains at an unsatisfactory level. In Asia, Japanese Exports rose 11.5% year over year, beating estimates. But this marks its lowest growth since January 2022. Automobile exports remains the primary growth catalyst as demand in the U.S. and Europe remained strong. The Bank of Indonesia raised its key interest rate 25 basis points to 5.75%. This marks the highest rate since the start of the pandemic, while New Zealand Prime Minister Jacinda Ardern unexpectedly announced her resignation to leave no later than February 7. Elsewhere, Oil rose 1.17% while Gold rose 1.34% after a late rally.
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Equities
The S&P 500 closed 0.76% lower at a price of 3898
The Dow Jones Industrial Average closed 252 points lower for a 0.76% loss at a price of 33,044.
The NASDAQ 100 closed 1.0% lower at a price of 11,295.
The Stoxx Europe 600 Index closed 1.48% lower.
This Morning, the MSCI Asia Pacific fell 0.8%.
This Morning, the Nikkei closed 1.47% lower at a price of 26,396.
Currencies
The Bloomberg Dollar Spot Index closed 0.2% lower.
The Euro closed 0.3% higher at $1.0829.
The British Pound closed 0.4% higher at 1.2390.
The Japanese Yen rose 0.3% closing at $128.40.
Bonds
Germany’s 10-year yield closed 8 basis points higher at 2.05%.
Britain’s 10-year yield closed 2 basis points higher at 3.40%.
U.S.10 Year Treasury closed 5 basis points lower at 3.28%.
Commodities
West Texas Intermediate crude closed 1.17% higher at $80.41 a barrel.
Gold closed 1.34% higher at $1934.10 an ounce.
This morning on the economic front we have German PPI and U.K. Retail Sales at 7.00 am. At 10.00 am we have another speech from ECB President Lagarde. This is followed by U.S. Existing Home Sales at 3.00 pm. Finally, we have a speech from Fed Member Waller at 6.00 pm.
Cash S&P 500
A late sell-off saw the S&P close below its 50 Day Moving Average, stopping me out of Wednesday’s 3942 long position at a price of 3899 and I am now flat. It is amazing that two-days of selling sees nothing but bearish commentary across the board. So far, the S&P is holding the key 3850/3870 support level. It is amazing that the post OPEX low in March 2021 was a price 3850. It has been a long journey and with Options expiring this evening we may test this range today or on Monday. I will be an aggressive buyer on any dip to this area with a 3835 ‘’Closing Stop’’. Better than expected results from Netflix is helping the S&P to have a small rally as I go to press. Bulls need to see the 50 Day Moving Average recaptured or else there is every chance we will test support below. I do not want to be short the S&P at this time.
EUR/USD
The Euro continues to trade above my 1.0750 buy level, consolidating last week’s aggressive move higher. The Euro is overbought while the Dollar is oversold given the extent of their respective moves since last October. Today, I will continue to be a buyer on any dip lower to1.0680/1.0750 with the same 1.0615 ‘’Closing Stop’’.
March Dollar Index
No Change. I am still long at an average rate of 102.10 with the same 101.35 ‘’Closing Stop’’. I will now lower my T/P level to 102.45. If any of the above levels are hit, I will be back with a new update for my Platinum Members.
Cash DAX
Finally, we are seeing some profit taking in the DAX which is no surprise given the extent of its rally since October. The DAX never came close to yesterday’s sell range and I am still flat. The DAX has short-term support from 14720/14810 where I will be an aggressive buyer with a 14595 wider ‘’Closing Stop’’.
Cash FTSE
My FTSE position worked well with the market selling off to my 7730 buy level before rallying to my 7780 T/P level and I am now flat. Today I will again be a buyer form 7660/7730 with the same 7595 ‘’Closing Stop’’.
Dow Rolling Contract
My Dow plan worked well as the market traded lower to my 33020 buy level before rallying to my revised 33205 T/P level and I am now flat. Given how oversold the Dow is trading I will now look to buy the market again on any further dip lower to 32700/32950 with a now lower 32495 ‘’Closing Stop’’. The Dow has resistance from 33800/34050 where I will be a seller with a 34305 wider ‘’Closing Stop’’.
Cash NASDAQ 100
Although the NDX continues to outperform the other American Indexes, the NDX got hit yesterday, hitting my 11320 buy level. I am still long and I will continue to add to this position at 11180 with the same 10995 ‘’Closing Stop’’. One worry for my long position is the fact we closed below the 50 Day Moving Average at 11402. As a result, I will now lower my T/P level on this position to 11390 which is just above yesterday’s high.
March BUND
The Bund just missed my initial 141.10 sell level with a 140.78 hight print. I am still flat and I will now lower my sell level to 140.60/141.30 with a wider 142.05 ‘’Closing Stop’’.
Gold Rolling Contract
No Change. Gold continues to outperform Silver and I am still flat. As I have a large, long Silver position, I will only raise my Gold buy level to 1890/1905 with a lower 1879 ‘’Closing Stop’’.
Silver Rolling Contract
Silver continues to find strong resistance above $24. Yesterday the market moved lower to my second buy level at 23.30 for a now 23.65 average long position. I have no stop. I will now lower my T/P level to 24.10. If any of the above levels are hit, I will be back with a new update for my Platinum Members.
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