U.S. Equity Markets finished yesterday’s quiet session higher, led by the 0.84% gain in the NASDAQ 100. Meanwhile, the VIX closed 4% lower at a price of 26.16. Markets were higher Wednesday as investors reacted to the August Producer Price Index (“PPI”) reading. August’s PPI release showed headline inflation falling 0.1% month over month (“MOM”). However, core PPI was up 0.4% MOM, which suggests that pricing pressures are still very present. One rail workers’ union voted to reject the proposed labour agreement, intensifying pressures of a strike, while domestic supply chains would be severely hindered as about 25% of all goods utilise freight-rail transit. Tuesday’s, hotter-than-expected inflation metrics for August sent a shockwave across Wall Street. Investors and money managers had anticipated that a steady decline in energy prices and easing food costs would lead the way for a rapid deceleration in inflation. Instead, the U.S. Bureau of Labour Statistics’ (“BLS”) CPI data for August rose 8.3% year over year (“YOY”) compared with Wall Street’s expectation for an 8.1% increase and the prior month’s 8.5% gain. And on a core basis, the CPI rose 6.3% YOY compared with the expectation for a 6.1% increase and July’s 5.9% gain. The numbers implied a 75-basis-point rate hike next week from the Federal Reserve is now all but certain. The reality of the matter is that inflation should not have been expected to disappear overnight. After all, it took 26 months to get here. It will take at least another 12 before we see a meaningful slowdown in cost growth. Central bank policymakers have told us they want to see interest rates around the 3.5% to 4% level before they consider pausing. There was nothing in those numbers to change that mantra. The sooner we get there, the better it will be for the long-term outlook for the economy and the S&P 500 Index. Inflation growth has slowed but it’s still nowhere near the 2% goal. So, more rate hikes should not be a surprise. But it’s the pace at which those increases happen and how long the Fed maintains peak interest rates that are the real questions. In fact, the central bank has never stopped raising rates while the “real” Federal-Funds target rate – a measure of the Federal-Funds target minus the CPI – has been negative. In other words, an inflation rate higher than 8.00% has a long way to go to meet the end-of-year federal-funds target of 3.5% to 4.00%. Remember, the central bank is focused on the long term. It is not just looking for one or two months of slowing data. It’s going to maintain high rates until it sees a sustainable and significant decline in inflation. But to get a better understanding of the outlook, let’s look at a few different scenarios of how inflation could play out over the next year. We want to observe it compared with the anticipated policy path. By gauging these future levels, it will provide us with a better blueprint of what the real Fed-Funds rate and future policy actions might look like. First, we must look back at inflation’s track record to set guardrails for our analysis. Pre-pandemic, from 2017 through 2019, the lowest month-over-month (“MOM”) inflation change was a drop of 0.1% while the highest MOM inflation growth was 0.5%. The important takeaway here is that the Fed’s actions are working but it will take time. In June of 2021, the annual inflation rate was 5.4%. In June of this year, inflation appears to have peaked at 9.1%. And even in our worst-case scenario, inflation still falls back to 5.1% in just 12 months’ time. The charts that I am following show central bank policy changes are beginning to weigh on price growth. However, they still have further to go until their goal is accomplished. In other words, in the short and long term, rates must remain high until prices become stable. The next meeting of the rate-setting Federal Open Market Committee is not until next Tuesday and Wednesday. And until investors feel more certain about the terminal interest rate, the S&P 500’s swings will be driven by headlines around inflation and the policy outlook. The sooner we see the real Fed-Funds rate approach 0%, the better it will be for the long-term outlook for the economy and risk assets like stocks. Within the S&P 500, six of the 11 sectors finished higher. European Markets closed lower. Markets retreated despite a softer-than-expected inflation report for the U.K. in August. Following the hot U.S. inflation report, experts believe the Bank of England will continue to push aggressive rate policy and raise rates by 0.75% next week. European Central Bank Chief Economist Philip Lane says he expects several more rates hikes. And the Euro-Zone Industrial Production was weaker than forecast for July. In Asia, Equities finished lower following Tuesday’s U.S.’s Consumer Price Index reading. The Dollar’s spike led to a verbal warning from Japan’s top foreign exchange official. A “rate check” was performed by the Bank of Japan – a move largely associated with imminent currency intervention. Reuters found that an overwhelming consensus of market watchers anticipate the People’s Bank of China to maintain current rates. And Japan’s core machinery orders for July were stronger than expected. Elsewhere, Oil rose 1.64%, while Gold continued to sell-off, closing lower by 0.69%
To mark my 2625th issue of TraderNoble Daiy 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 545 points yesterday and is now ahead by 2297 points for September, 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 0.34% higher at a price of 3946.
The Dow Jones Industrial Average closed 30 points higher for a 0.1% gain at a price of 31,135.
The NASDAQ 100 closed 0.84% higher at a price of 12,134.
The Stoxx Europe 600 Index closed 0.86% lower.
This morning, the MSCI Asia Pacific Index fell 0.4%.
This morning, the Nikkei closed 0.21% higher at a price of 27,875.
Currencies
The Bloomberg Dollar Spot Index closed 0.2% higher.
The Euro closed 0.1% lower at $0.9978.
The British Pound closed 0.1% lower at 1.1500.
The Japanese Yen rose 0.7% closing at $14365.
Bonds
Germany’s 10-year yield closed 2 basis points higher at 1.74%.
Britain’s 10-year yield closed 2 basis points lower at 3.13%.
US 10 Year Treasury closed 2 basis points higher at 3.44%.
Commodities
West Texas Intermediate crude closed 1.64% higher at $86.61 a barrel.
Gold closed 0.69% lower at $1693.10 an ounce.
This morning on the Economic Front we already had the release of German Wholesale Price Index for August YoY which rose 18.9% versus +19.5% expected. Next, we have Euro-Zone Trade Balance at 10.00 am and a speech from ECB Member De Guindos at 10.15 am. This is followed by U.S. Weekly Jobless Claims, Retail Sales and the Philly Fed Manufacturing Survey at 1.30 pm. Finally, we have Industrial Production and Capacity Utilisation at 2.15 pm.
Cash S&P 500
Following Tuesday’s disastrous day for my Platinum Service, yesterday’s S&P plan worked well as the market traded lower to my 3920 buy level before rallying to my 3955 aggressive buy level and I am now flat. So far, the main trendline is holding as we wait for the Quadruple Expiration tomorrow when the September Futures and Options Contracts expire. September Expirations tend to be positive and is one of the main reasons why I have been long this week. Obviously, this was the wrong call on Tuesday. As I mentioned yesterday, if the trendline breaks we can flush to a low of 3820 where I will continue to be an aggressive buyer with no stop. Today, the S&P has support from 3905/3925 where I will again be a buyer with the same 3883 stop. If I am taken long I will have a T/P level at 3950.
EUR/USD
No Change. I am still long from Monday at an average rate of 1.0060. I have no stop while lowering my T/P level to 1.0100.
March Dollar Index
I am short and wrong the Dollar as I patiently wait for a weaker Dollar to kick in. Equity Markets will not have a sustained rally without a weaker Dollar and Central Banks know this. It is only a matter of time before we see some intervention to stem the fall in the Japanese Yen. This morning, the Dollar is trading at 109.50. I will now add to my existing 107.50 short position on any further move higher to 110.10.
Cash DAX
Wrong!! I was stopped out of my 13240 long position at 13085 shortly after I posted yesterday morning and I am still flat. The DAX has short-term support from 12800/12900 where I will be an aggressive buyer with a wider 12695 stop.
Cash FTSE
The FTSE sold off to my 7270 buy level before rallying this morning. Ahead of the key U.S. Data at 1.30 pm I have now exited this position here at 7320 and I am now flat. The FTSE has short-term support from 7190/7250 where I will again be a buyer with a 7135 stop.
Dow Rolling Contract
The Dow continues to trade heavy, underperforming both the S&P and NDX yesterday. The market sold off to my 30950 buy level. We are rallying this morning and I have decided to take advantage of this move by existing this long position here at 31170. Today, I will again be a buyer on any further dip lower to 30650/30850 with a 30495 stop.
Cash NASDAQ 100
The NDX just missed yesterday’s buy range and I am still flat. I will not chase the NDX higher, leaving my 11830/11980 buy level unchanged with the same 11695 stop. If I am taken long I will have a T/P level at 12130.
December BUND
My Bund plan worked well as the market again traded lower to my 143.00 buy level before rallying to my 143.80 T/P level and I am now flat. This morning, the Bund is trading lower at 143.10. We have support from 141.80/142.50 where I will again be a buyer with a lower 140.95 ‘’Closing Stop’’.
Gold Rolling Contract
No Change. I am still long at 1702 with the same 1683 ‘’Closing Stop’’. I will now lower my T/P level to 1705 and if any of the above levels are hit I will be back with a new update for my Platinum Members.
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 lowering my T/P level to 19.80.
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