Despite a late rally, U.S. Equity Markets finished Friday’s session lower led by the 0.72% loss in the S&P. Markets were lower as investors retreated from risky stocks while negative corporate developments played into the broader earnings risk theme. Notably, FedEx (FDX) announced a big earnings miss and scrapped its full-year guidance while also warning of a global downturn. The September Michigan Consumer Sentiment Index showed inflation expectations easing, but consumers remain very cautious as the uncertainty dynamic rose, while money managers are still concerned by expectations that the Federal Reserve will raise interest rates by another 75 basis points on Wednesdsay. Manufacturing costs are dropping, which should help to put money back in consumers’ pockets! From March 2020 through April of this year, the domestic economy has seen costs rocket higher. What was once a tailwind following the onset of the COVID pandemic turned into a headwind with economic activity rebounding and manufacturers unable to keep up. This forced the Federal Reserve to raise interest rates to try and bring price growth back under control. So, we want to watch for any changes in direction. Last Thursday, the Federal Reserve Bank of New York released its Empire State Manufacturing Survey for September. The overall number was stronger than expected, with an index value of -1.5 compared with the expectation for -12.9 and August’s -31.3. Yet, it marked the first time the gauge has maintained a negative reading for two straight months since early 2020. At the same time, the Federal Reserve Bank of Philadelphia released its Manufacturing Business Outlook Survey for September. The headline number unexpectedly declined, with a reading of -9.9 compared with the expectation for +2.3 and August’s reading of +6.2. This marked the third contraction in the last four months. We want to pay attention to New York because it is the third-largest state behind California and Texas in terms of its contribution to national Gross Domestic Product. However, the Philly Fed began administering its survey in May 1968, so it offers a more comprehensive data set. The standout numbers were prices paid and prices received… They are key measures of inflation growth. And both metrics showed a steady downward trend since peaking earlier this year. A sustained change will support a long-term rally in the S&P 500 Index. The reports are gauges of local business activity. The regional central banks send questionnaires out to manufacturing executives in their districts each month. Those companies are asked about the state of current business in addition to the state of activity six months down the road. Prices paid is important because it tells us what manufacturers are paying to produce their goods. In other words, we can think of it relative to the U.S. Bureau of Labour Statistics’ Producer Price Index (“PPI”). In each of the September surveys, the gauge hit the lowest level since December 2020, pointing toward a further drop in manufacturing costs. Prices received is an equally important reading. This measure tells us what companies are collecting for their finished goods. In other words, what it is costing individuals to buy something. So, we can think of it relative to the U.S. Bureau of Labour Statistics’ Consumer Price Index (“CPI”). The September reading from New York is at the lowest level since February 2021 and points toward further weakness in the CPI. While the Philly data experienced a slight rebound, it still remains near the lowest level since February 2021 and suggests the CPI should drop. Both measures are leading indicators of the direction of inflation. Federal Reserve Chairman Jerome Powell has told us the central bank will need to cool overall economic growth in order for cost growth to fall. The Fed started down that path in March by raising interest rates. The change in policy direction corresponds closely with the shift in prices paid and received. The overall survey numbers remain well below their five-year average readings – and the subindexes tell us inflation growth is cooling. From the end of 2016 to the start of the COVID-19 pandemic, the Empire State Manufacturing Survey’s prices paid index had an average value of 33 while the same number for the prices received index was 13.4. Thursday’s readings of 39.6 and 23.6, respectively, tell us there is still more room to the downside. but we are steadily filling in the gap. The Philly Fed survey’s prices paid reading was 29.8 compared with last month’s 43.6, the April peak of 84.6, and the five-year average of 41.5. The prices received number was 29.6 compared with last month’s 23.3, the November 2021 peak of 62.9, and the five-year average of 27.06. Longer term, this is a trend money managers who are investing for eight to 12 months down the road must see in order for them to grow 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 Fed-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. This will support a longer-term rally in the S&P 500. Within the S&P 500, nine of the 11 sectors finished lower. European Markets closed lower. Markets continue to see fallout from U.S. inflation data. Expectations of a more aggressive Fed are increasing pressure on the European Central Bank (“ECB”) to raise rates at a similar pace. ECB President Christine Lagarde said that the Governing Council will prioritise its focus on price stability over growth. Meanwhile, a Bank of England survey found that people’s expectations for inflation over the coming year rose to a record high last month. In Asia, China’s August activity data was stronger than expected, defying expectations of a hit to growth. Property sales contracted sharply again while real estate shrank further as China’s housing downturn continues. Home prices registered its biggest year-over-year fall since August 2015. The Yuan was down again following weaker-than-expected fixing by the People’s Bank of China. And Australia’s central bank expects further rate hikes to return inflation to target, but it will be appropriate to slow the pace of tightening at some point and policy is not on a pre-set path. Elsewhere, Oil rose 0.22% while Gold closed higher by 0.35%
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Equities
The S&P 500 closed 0.72% lower at a price of 3873.
The Dow Jones Industrial Average closed 139 points higher for a 0.45% loss at a price of 30,822.
The NASDAQ 100 closed 0.55% lower at a price of 11,861.
The Stoxx Europe 600 Index closed 1.58% lower.
Last Friday, the MSCI Asia Pacific Index fell 0.4%.
Last Friday, the Nikkei closed 1.08% lower at a price of 27,574.
Currencies
The Bloomberg Dollar Spot Index closed 0.1% lower.
The Euro closed 0.1% higher at $1.0005.
The British Pound closed 0.3% lower at 1.1422.
The Japanese Yen rose 0.3% closing at $142.95.
Bonds
Germany’s 10-year yield closed 2 basis points lower at 1.76%.
Britain’s 10-year yield closed 4 basis points lower at 3.13%.
US 10 Year Treasury closed 2 basis points higher at 3.45%.
Commodities
West Texas Intermediate crude closed 3.71% lower at $83.39 a barrel.
Gold closed 2.02% lower at $1669.10 an ounce.
This morning on the Economic Front we already have Euro-Zone Construction Output at 10.00 am. The only other data of note is the U.S. NAHB Housing market Index at 3.00 pm.
Cash S&P 500
The Fed news saw the S&P come close to my 3820 aggressive buy level with a 3836 low print. A late rally saw the S&P rally 45 Handles into the close. The Market is now getting more oversold with plenty of positive divergences which is no surprise after falling over 300 Handles since Tuesday’s CPI print. In my opinion most of the bad news is now priced in as there is no chance the Fed will hike by more than 75 bps on Wednesday. Even a 75 basis point hike is guaranteed to cause a recession as the market will not be able to cope with debt levels at such extreme levels. I am still long the S&P from early Friday morning at an average rate of 3875 with the same 3849 ‘’Closing Stop’’. I will continue to be an aggressive buyer on any dip lower to 3820 with no stop. I will now lower my T/P level on this latest long position to 3895 and if any of the above levels are triggered, I will be back with a new update for my Platinum Members.
EUR/USD
No Change. I am still long from last Monday at an average rate of 1.0060. I have no stop while lowering my T/P level to 1.0100.
March Dollar Index
The Dollar had a small sell-off on Friday, closing at 109.30. I am still short at 107.50 with the same 107.10 T/P level. I will add to this position at 110.10 and if this level is triggered, I will come back with a new update for my Platinum Members
Cash DAX
No Change. I will repeat what I said on Friday. If there is any Index in the world that has had every excuse to break the uptrend line, it is the DAX. No major economy has a worse fundamental outlook than Germany at the moment, given the energy crisis, massive overall inflation and Europe facing a massive recession. The DAX should be breaking down but the short-term chart shows continued support. The recent reversal on U.S. CPI has seen the DAX break below the weekly 200 Day Moving Average again. But what is fascinating is that the price is hovering where it was seven years ago having twice tested this support in the past year. I do not know what more they can throw at Germany at the moment with sentiment being the worst ever. The DAX has not tagged its 200 Day MA since February 2 so a rally in my opinion is imminent. Of course, we do need to see a weaker Dollar to enhance my view. I am still long the DAX from Friday at an average rate of 12840. I will now lower my T/P level to 12890 while leaving my 12695 ‘’Closing Stop’’ unchanged.
Cash FTSE
Shortly, after I posted on Friday, the FTSE rallied to my 7290 T/P level on my 7210 long position and I am now flat. With London Markets closed today for the funeral of Queen Elizabeth, I will stay flat the FTSE until tomorrow.
Dow Rolling Contract
My Dow plan worked well. After the Dow hit my second buy level at 30580 for a 30680 average long position we rallied just before the close to my revised 30820 T/P level and I am now flat. Today, I will again be a buyer on any dip lower to 30450/30650 with a lower 30395 ‘’Closing Stop’’.
Cash NASDAQ 100
I am still long the NDX from early Friday morning at an average rate of 11890. I will leave my 11695 stop unchanged while lowering my T/P level to 11960.
December BUND
My latest long 142.30 Bund position worked well as the market rallied to my 143.00 T/P level and I am still flat. I will again be a buyer on any dip lower to 141.50/142.20 with the same 140.95 ‘’Closing Stop’’.
Gold Rolling Contract
The weaker Dollar saw Gold have a small 0.35% rally into the New York close. I am still flat. Today, I will be a small buyer on any dip lower to 1648/1663 with a 1639 ‘’Closing Stop’’.
Silver Rolling Contract
No Change. I am still long at 19.25. I will continue to look to add to this position on any further move lower to 18.55 while leaving my T/P level unchanged at 19.80.
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