Despite Bond Yields breaking their June high, U.S. Equity Markets reversed earlier losses to close higher on the day led by the 0.7% gain in the NASDAQ 100. Markets closed higher as investors await the Federal Reserve’s policy decision on Wednesday. Money managers are expecting that the Fed will raise interest rates by another 75 basis points. Bond yields continued to surge with the 10-year U.S. Treasury note rising above 3.50% for the first time since 2011. Two-year notes pushed north of 4.00% for the first time since October 2007. And the National Association of Home Builders’ Housing Market Index for September fell for the ninth straight month, signalling the housing market continues to decline. Wall Street hates uncertainty. Time and again, when we see the market in a freefall, it usually centres on one main issue. Money managers are uncertain about the outcome of an upcoming economic or geopolitical event. The recent turmoil we have experienced is no different. Their fiduciary is to protect clients’ assets. Otherwise, they would not have money to manage. So, they sell assets to raise cash. That way, they have money to invest when they think the market has bottomed. Otherwise, by sitting on their hands and doing nothing, they can only sit and watch when the rebound happens. Tomorrow, the Federal Reserve is scheduled to announce its latest policy update. The consensus expectation is for a 0.75% interest rate increase, which will raise the Federal Funds rate to 3.25%. That compares with the 0% level seen as recently as March. One of the main concerns is the outlook for inflation growth going forward. Last week, the U.S. Bureau of Labour Statistics released Consumer Price Index (“CPI”) data for August. It showed that costs grew 8.3% year over year compared with July’s 8.5% and 9.1% in June. And while the reading indicated the pace of increase is slowing, the number came as a disappointment compared with Wall Street’s 8.1% expectation. And if Fed Chairman Jerome Powell fails to assuage investors’ fears, that could weigh on the near-term outlook for the S&P 500 Index. Investors are worried about what that could mean not just regarding the pending interest rate announcement, but more importantly, for the pace of rate hikes moving forward. We can see that in just over one month’s time, the yield has risen from around 2.8% to more than 3.4%. That is a huge move. That tells us investors are worried about the potential path of rate increases. In other words, they are not certain of what the central bank’s final goal is in terms of rate hikes. But remember, bond prices and yields have an inverse relationship. So, if you thought the future yield of an investment was headed even higher, why would you want to own that same bond at a price where the payout is worse? You wouldn’t. That causes the price of those securities to drop until the yield finds a level where investors are willing to buy it. Currently, Fed policymakers have guided for a year-end interest rate of around 3.5% to 4%. Now, we are getting close to the bottom end of that range. However, last week’s inflation numbers left money managers unsure of the central bank’s reaction. After all, Powell has told us that it wants to see a sustained move lower in inflation. And while the August numbers did show a steady move lower over the last two months, the dip from July into August was not as large as the one we experienced from June to July. Adding to the uncertainty around the meeting of the rate-setting Federal Open Market Committee is the Summary of Economic Projections (“SEP”). It is the quarterly economic growth and inflation forecast produced by all of the Fed governors and regional presidents. It’s also known as the “dot plot” – it’s a mass of dots that shows the next few years and then the long term. The SEP is important because members predict future interest rate targets. Wall Street looks to see where the majority are centred and uses that to determine policy expectations. In June, when the report was last updated, the central bank raised its projection for end-of-the-year interest rates from 1.9% to 3.4%. For 2023, the same number shot up from 2.8% to 3.8%, while for the long term it rose from 2.4% to 2.5%. But now, as I mentioned above, policymakers are already guiding for rates to finish the year above the projections made in June. And for 2023, they have suggested rates need to go to the 4.25% to 4.5% level. In other words, the new forecast next week will guide for higher interest rates. During the second quarter, CPI growth averaged roughly 8.6%. And for the third quarter, the metric has not changed much with an 8.4% average. So, it’s unlikely the central bank will move its targets for inflation and interest rates lower. If it does anything, those numbers will go up. So that leaves investors wondering about the long-term cost outlook. As rates go up, it costs more for businesses and households to borrow. That means companies or individuals with high levels of debt will have to spend more on interest payments for things like credit cards or home-equity loans. The change means less disposable income to be spent on anything. Eventually, that shows up in the form of declining economic output. Right now, with investors uncertain about the longer-term path of inflation growth, they are also wary of the Fed’s intentions for interest rates. They expect rates to continue to rise, they just don’t know for how long and by how much. So, Powell’s comments on Wednesday afternoon are going to be paramount for the near-term direction of the stock market. As I said at the start, Wall Street anticipates rates will be at 3.25% by the end of Wednesday. But what they really want to know is if we’re getting closer to the end of this process than we are to the start. They would like to hear the Fed chairman say something along the lines that the pace of rate increases should slow moving forward as inflation growth is starting to ease. Because once that happens, portfolio managers and analysts can better model what the cost outlook for consumers and businesses will look like. They can then put fair-value multiples on stocks and indexes, which tells them when to invest. And as that change happens, it will allow the stock market to rally. But if Powell leaves the door open to conjecture, that could be a problem for stocks in the near term. After the September meeting, there is not another policy announcement until November. And even though there will be plenty of speaking engagements in between the meetings, that is a long time for investors to guess what the central bank is going to do next. Within the S&P 500, nine of the 11 sectors finished higher. European Markets closed mixed. Trading remained relatively quiet on a day that U.K. markets were closed. Investors continue to anticipate that the Fed and the European Central Bank (“ECB”) will remain on an aggressive rate-policy path in the short term. On Saturday, ECB Chief Economist Philip Lane reiterated his view that the ECB will continue to hike rates even if it causes more economic pain. And European nations continue to negotiate the region’s joint energy plan heading into the winter. In Asia, Equities finished down as investors await a busy week of central-bank rate-policy actions. Stocks in Hong Kong, South Korea, and Taiwan all fell on concerns rate hikes will weigh on economic activity. Japanese markets were closed. China’s Chengdu region is set to exit lockdowns after just two weeks. And U.S. President Joe Biden warned China that any attack on Taiwan would be directly defended by U.S. forces. Elsewhere, Oil closed 0.73% higher while Gold closed flat.
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 693 points yesterday and is now ahead by 3320 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 0.69% higher at a price of 3969.
The Dow Jones Industrial Average closed 197 points higher for a 0.64% gain at a price of 31,019.
The NASDAQ 100 closed 0.77% higher at a price of 11,953.
The Stoxx Europe 600 Index closed 0.07% higher.
Yesterday, the MSCI Asia Pacific Index fell 0.4%.
Yesterday, the Nikkei closed 1.1% lower at a price of 27,567.
Currencies
The Bloomberg Dollar Spot Index closed 0.1% lower.
The Euro closed 0.1% higher at $1.0018.
The British Pound closed 0.1% higher at 1.1436.
The Japanese Yen fell 0.2% closing at $143.17.
Bonds
Germany’s 10-year yield closed 4 basis points higher at 1.80%.
Britain’s 10-year yield closed 1 basis points higher at 3.14%.
US 10 Year Treasury closed 4 basis points higher at 3.49%.
Commodities
West Texas Intermediate crude closed 0.73% higher at $83.99 a barrel.
Gold closed flat at $1669.10 an ounce.
This morning on the Economic Front we have German PPI at 7.00 am, followed by Euro-Zone Current Account at 9.00 am. At 1.30 pm we have U.S. Building Permits and Housing Starts, Finally, we have Canadian CPI at 1.30 pm and a speech from ECB President at 6.00 pm.
Cash S&P 500
With sentiment at such extreme levels yesterday morning is should come as no surprise to see the nice rally that unfolded once the American Markets opened before accelerating into the close. The positive divergences that I mentioned at length yesterday finally worked out with the S&P rallying from a low of 3830 to hit my 3895 T/P level on my latest 3875 average long position and I am now flat. If Powell even hints at pausing of rates tomorrow in his press conference than the Dollar and Bond Yields should tank dragging the S&P higher. The stress on currencies given the massive velocity of moves is intense. Even the Pound is at a 37 year low. The 10-year has rallied seven weeks in a row while the 2-year is trading at its highest level since October 2007. The debt levels cannot handle higher rates and with the mid-term elections one week after the November Meeting it makes sense to go on hold after Wednesday’s rate hike. Today, I will again be a buyer of the S&P on any drop lower to 3865/3885 with the same 3849 ‘’Closing Stop’’. I will continue to be an aggressive buyer in front of 3820 with no stop.
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
No Change. 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
The DAX got hit hard yesterday morning, trading to a new low for this move at 12605 before rallying 300 points. This move higher saw my revised 12868 T/P level triggered and I am now flat. Today, I will again be a buyer on any dip lower to 12700/12780 with a 12595 ‘’Closing Stop’’.
Cash FTSE
I am still flat the FTSE. We have short-term support from 7150/7220 where I will again be a buyer with a 7085 tight stop. Given the incredible weakness in Sterling I certainly do not want to be short the FTSE at this time.
Dow Rolling Contract
My Dow plan worked well. The Dow hit my buy range mid-morning at 30600 before rallying to my 30860 T/P level and I am now flat. Today, I will again be a buyer on any dip lower to 30580/30780 with the same 30395 ‘’Closing Stop’’.
Cash NASDAQ 100
It took a long time, but just before the Chicago close, the NDX rallied to my 11960 T/P level on Friday’s 11890 long position and I am now flat. I am impressed how the NDX recovered given the back up in Bond Yields. The NDX is severely oversold after falling over 11% from Tuesday’s pre-CPI print. The NDX has support from 11730/11880 where I will again be an aggressive buyer with the same 11695 ‘’Closing Stop’’.
December BUND
My Bund plan worked well with the market trading lower to my 142.20 buy level before rallying to my revised 142.65 T/P level and I am now flat. Today, I will again be a buyer on any dip lower to 141.10/141.70 with a 140.55 ‘’Closing Stop’’.
Gold Rolling Contract
My Gold plan also worked well as the market trading lower to my 1669 buy level before rallying to my revised 1670 T/P level and I am now flat. Gold has support from 1643/1658 where I will again be a buyer with a lower 1629 ‘’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 lowering my T/P level to 19.80.
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