U.S. Equity Markets finished Wednesday mixed. While the Dow and Russell 2000 closed higher, the NASDAQ 100 got hit hard, closing lower by 2.26%. Markets finished a volatile day of trading following poor tech earnings led by Alphabet (GOOGL) and Microsoft (MSFT) after hours Tuesday. The Bank of Canada raised rates 50-basis points, lower than the expected 75-basis points. This put pressure on the Federal Reserve to tone the pace of rate hikes. September’s U.S. New Home Sales came in above consensus but it is still on the decline. Meanwhile, the latest recessionary signal for investors came as the three-month and 10-year yield curve inverted. This is typically a sign of an impending recession and that the rate tightening cycle is close to an end. A key inflation metric proves we are at the tip of an economic downturn. Typically, the housing market is always the first economic industry to feel the pain of interest-rate hikes. Last month, we started to see signs that the housing market was at a turning point. Now, it appears that we are looking at the first sizable shift to a key inflation metric. When the central bank first started hiking rates in March, Chairman Jerome Powell said there will be moments when it needs to step back and study the effects of policy on the economy. He, along with FOMC voting members like Vice Chair Brainard and Kansas City Fed President Esther George, said it usually takes six to eight months before rate hikes play out in the data. Now, here we are, seven months after the first-rate increase- And the historically first “domino to fall” – the housing market – is giving the Fed enough reason to consider slowing rate hikes. If the Fed believes that a large contributor (housing) to the Consumer Price Index (“CPI”) is destined to slow, they will signal to investors that the bulk of rate hikes are in the rearview mirror. But until institutional investors get a sense of that policy shift, continued hawkish (inclined to raise rates) rhetoric will weigh on the outlook for the S&P 500. On Tuesday, the Case-Shiller Home Price Index (“HPI”) and the Federal Housing Finance Agency (“FHFA”) House Price Index for August were released. The Case-Shiller Home Price Index incorporates more of a lag in its data – August’s data is a three-month average of closing prices from June through August. These closing prices can still include contracts signed before mortgage rates started to quickly climb. The month-over-month change in the Case-Shiller HPI was -0.86%, a further deceleration from last month’s -0.44%. This was the second consecutive month-over-month (“MOM”) decline, and the largest decline since February 2010, which suggests price growth in August stalled to a halt. The Case-Shiller data is still only incorporating demand at an average loan rate of 5.4% (months highlighted in red). As mortgage rates continue to skyrocket north of 7%, demand is going to continue to dimmish sending prices lower. The FHFA House Price Index posted another decline in August, down 0.7% MOM. The major takeaway here is that even though these two indexes incorporate data that is not up to date, a major housing slowdown is still obvious. This would lead us to believe that subsequent monthly data should reflect further declines. Remember, the pandemic-era housing boom sent demand surging. So even in an economic environment where houses are becoming less affordable, average demand is likely to remain above long-term averages. In other words, it is going to take longer than average for decreased demand to force home prices back down to pre-pandemic levels. But there seems to be a significant difference in this housing cycle. Typically, house prices and inventory have an inverse relationship. Basically, an application of the supply-and-demand curve. Remember, housing accounts for nearly 40% of the CPI. Once the housing market fully corrects itself and expunges all the excess demand of the last two years, inflation should fall. Slowing inflation would signal to the Federal Reserve that its rate-hike policy is working. This would prompt the central bank to back down on additional aggressive rate hikes, boosting investor sentiment and the long-term outlook for the S&P 500. Within the S&P 500, five of the 11 sectors finished lower. European Markets closed higher. Markets extended their gains despite little change in the narrative among investors. Investors are eyeing the growing likelihood of the Federal Reserve pivoting, while historically low sentiment supports equity gains. Early sentiment was negative following poor tech earnings from the U.S. But the growing momentum of lower terminal rates from central banks and a weaker Dollar helped rally equities. French Consumer Confidence stabilised with cost-of-living expectations improving slightly. Meanwhile investors look toward the European Central Bank’s (“ECB”) policy decision this afternoon. In Asia, Markets rose despite headwinds from ongoing fears over China’s poor economic growth indicators, as well as reports that Wuhan went into another lockdown. Currencies rose, which fuelled stocks higher. Yuan intervention reports and assurances from Beijing ignited the rally. The Bank of Japan increased purchases of super long bonds as yields rose along the maturity curve, while Australia’s inflation spiked to a 32-year high. Elsewhere, Oil surged 3.29% while Gold rose 0.63% on a weaker Dollar.
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Equities
The S&P 500 closed 0.74% lower at a price of 3830.
The Dow Jones Industrial Average closed 2 points higher for a 0.01% gain at a price of 31,838.
The NASDAQ 100 closed 2.26% lower at a price of 11,405.
The Stoxx Europe 600 Index closed 0.66% higher.
This morning, the MSCI Asia Pacific Index rose 0.3%.
This morning, the Nikkei closed 0.32% lower at a price of 27,345.
Currencies
The Bloomberg Dollar Spot Index closed 1.3% lower.
The Euro closed 1.1% higher at $1.0069.
The British Pound closed 1.30% higher at 1.1603.
The Japanese Yen rose 1.4% closing at $146.02.
Bonds
Germany’s 10-year yield closed 7 basis points lower at 2.14%.
Britain’s 10-year yield closed 5 basis points lower at 3.58%.
US 10 Year Treasury closed 7 basis points lower at 4.03%.
Commodities
West Texas Intermediate crude closed 3.29% higher at $89.93 a barrel.
Gold closed 0.61% higher at $1662.10 an ounce.
This morning on the Economic Front we already had the release of German GFK Consumer Sentiment which came in as expected with a 41.9 print. At 10.00 am we have U.K. CPI, followed by the ECB Rate Announcement at 1.15 pm. Next, we have U.S. Weekly Jobless Claims, Durable Goods Orders and GDP at 1.30 pm. This is followed by the Lagarde Press Conference at 1.45 pm. Finally, at 4.00 pm we have the Kansas Fed Manufacturing Activity Index.
Cash S&P 500
The early weakness in the S&P produced another rally as the market briefly broke above its 50 Day MA (3859) on the back of the Bank of Canada only raising rates by 50 basis points. This raises speculation that Central Banks are finally getting concerned about financial stability and how it may impact the Fed’s thinking ahead of next week’s FOMC Meeting. Both the Dollar and Bond Yields fell, helping the S&P to hit a high of 3885 before falling 60 handles which is no surprise given the 270 Handle rally since Friday. I sold the S&P at 3880 buy unfortunately covered this position too early at 3870 and I am still flat. Today, I will raise my buy level to 3798/3818 with a higher 3775 ‘’Closing Stop’’. The S&P has strong resistance at the post September Fed hike high from 3895/3915 where I will be an aggressive seller with a 3931 wider ‘’Closing Stop’’.
EUR/USD
The Euro continues to rally without giving me a chance to get on board. I am reluctant to chase the market higher ahead of the ECB Meeting this afternoon. The Euro has support from .9880/.9950 where I will be a strong buyer with a .9795 higher ‘’Closing Stop. I still do not want to be short the Euro at this time.
March Dollar Index
The Dollar has weakened by over 4% in the past week and is now testing its 2022 trendline. The Dow has resistance from 110.70/111.50. I will lower my sell level to this range with a 112.15 tight stop.
Cash DAX
I am still flat as we eagerly await the ECB’s lates rate hike at 1.15 pm. The consensus is for another 75-basis point rise and I would not disagree with this view. Despite every chance for the DAX to fall further given the awful economic backdrop, the market has surged, confounding the bears again. The DAX has support from 12930/13010. I will now raise my buy level to this area with a higher 12855 ‘’Closing Stop’’.
Cash FTSE
My FTSE plan worked well as the market traded lower to my 6970-buy level before rallying to my 7020 T/P level and I am now flat. The price action continues to tell me to be a buyer of dips. Today, my buy level will be from 6910/6980 with the same 6835 ‘’Closing Stop’’.
Dow Rolling Contract
The Dow never came close to yesterday’s buy level as the market again led the market higher. The Dow has now rallied over 3000 points since its post CPI low two weeks ago. This is an enormous move, resulting in the 14-DAY RSI getting overbought, closing at 66 last night. The McClellan Oscillator is also overbought, closing with a +230 print last night. This is a warning sign not to put on long positions at these levels. The Dow has resistance from 32250/32500 where I will be a seller with a 32705 ‘’Closing Stop’’.
Cash NASDAQ 100
My NDX plan worked well as shortly before the American Indexes opened the NDX traded lower to my 11420-buy level before rallying to my 11540 T/P level with a rebound high at 11657, before falling a huge 250 points into the close. The NDX has support from 11170/11320 where I will again be a buyer with a lower 11085 ‘’Closing Stop’’.
December BUND
No Change. The Bund has support from 136.70/137.50 where I will be a small buyer with a 135.95 ‘’Closing Stop’’.
Gold Rolling Contract
No Change. I will continue to be a buyer on any dip lower to 1627/1642 with the same 1615 ‘’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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