U.S. Equity Markets finished Thursday lower led by the 2% fall in the NASDAQ 100. Markets ended the day lower in their continued reaction to the Federal Reserve’s fourth-consecutive rate hike of 75 basis points. Investors worry about Fed Chairman Jerome Powell’s statement on Wednesday that it is too early to predict a terminal rate and that the central bank is not planning to pause its hikes anytime soon. October’s ISM Services Purchasing Managers’ Index (“PMI”) missed estimates and fell from the previous month. Jobless Claims data for the week, plus layoffs and job cuts data for September, dashed investors’ hopes for a slowdown in rate hikes. However, the outlook for the labour market continues to decline slowly as major companies keep shrinking their labour forces heading into 2023. Federal Reserve Chairman Jerome Powell is determined to kill the economy. Wednesday marked the latest monetary-policy update from the central bank. In typical fashion, Powell delivered a hawkish (inclined to raise interest rates) message. He said the Fed still has a way to go before reaching peak rates. In fact, he admitted the central bank would rather go too far in rate hikes than run the risk of not going far enough. It is worried about seeing a repeat of what happened in the 1970s. At the time, one of Powell’s predecessors cut interest rates too soon and inflation shot right back up. This meant that monetary policy had to tighten further. The Federal Open Market Committee (“FOMC”) wants to tread carefully so that inflation expectations do not become entrenched. The longer high inflation persists, the more it will hurt long-term economic growth. Households and businesses will feel it’s in their best interests to save, rather than spend because prices are rising too quickly. But we must remember that Powell has one primary job as Fed chief- set conservative expectations for the economic outlook. That way, any outcome other than an economic disaster is upside relative to expectations. While this could hinder the near-term outlook for the stock market, it should support a longer-term boom for the economy and the S&P 500 Index. As expected, the FOMC raised rates by another 0.75% – similar to decisions made in June, July, and September. This increases the Federal-Funds target from a range of 3% to 3.25% to a new range of 3.75% to 4%. The FOMC also said It would be appropriate for additional raises going forward, given the economic picture. Powell noted that domestic financial conditions have tightened significantly since the central bank began raising rates. These changes are starting to materialise in the form of slowing demand. However, it will take some time for the full effect of rate increases to be felt throughout the economy and on inflation. He said U.S. Gross Domestic Product growth has slowed appreciably compared with last year’s rapid expansion. Economic output is roughly flat so far this year compared with the 5.7% increase experienced in 2021. Right now, the Fed is focused on bringing balance back into the housing and labour markets. Housing activity has noticeably weakened due to rising mortgage rates. But Powell said the labour market remains extremely tight as demand for workers continues to far outstrip supply. Recent indicators show modest growth and production so far in the fourth quarter. But cost pressures remain persistent across a broad range of goods and services. As a result, inflation has remained higher than previously anticipated. The FOMC has noted the uncertainty around the level of peak interest rates. Powell said that will depend on the incoming economic numbers. But it’s likely that the interest-rate peak will be higher than the 4.50% to 4.75% committee members previously anticipated. So, it remains focused on bringing down inflation growth to its target. The objective will likely require a sustained period of below-trend economic output. But what really spooked investors was Powell’s statement on overtightening. He said if that happens, the central bank could use its tools to correct any mistakes and support the economy. As I said earlier, the FOMC is more worried about not raising rates far enough or easing rates too soon, causing expectations for high inflation to become entrenched. He elaborated that it is still premature to consider pausing rate increases. The Fed Chair then endorsed higher rate-hike guidance in the December Summary of Economic Projections. He said central bank members will update their economic outlooks and inflation expectations at that point. In other words, that is when we will have a better idea of how high policymakers think interest rates must rise. When asked about the timing of a slowdown in the pace of rate hikes, Powell said the FOMC needs to first see inflation growth ease. He said that it will be looking at the change in real Fed-Funds rates (interest rates minus inflation) as well as tightening financial conditions. However, Powell said the time may be coming to slow rate hikes. He said it could be as soon as the next meeting in December or the one after in January. At the end of the day, this was the same message from the central bank and its Chair that we have been hearing. It’s still trying to do what it thinks is best for the economy. It is worried about taking its foot off the gas too soon. What was new was the potential for the Fed’s interest-rate guidance to head higher than previous disclosures. However, prior to this meeting, investors were pricing in an interest-rate peak of 5.05% in May of next year, which did not change. So, as I said at the outset, Powell’s job is to set expectations for the worst-case outcome so anything else is upside. Wednesday’s meeting and press conference did not change any of that missive. These statements let some air out of a market that had rallied over 10% from its October 12 lows. The Fed is not opposed to changing course. It just wants confirmation from the economic data first. The sooner inflation growth slows, the better the long-term outlook for the S&P 500. Within the S&P 500 Index , six of the 11 sectors finished lower. European Markets closed in the red. Markets ended largely down as investors reacted to the Fed’s rate decision and hawkish guidance Wednesday after hours. The Bank of England (“BOE”) hiked interest rates by 75 basis points to 3.00%, as expected. BOE guidance struck a dovish tone, showing concern that current market-priced rate hikes would result in a prolonged, deep recession. The final U.K. Services PMI was revised upward, but it was still its first decline in 20 months. Meanwhile, the majority of European Central Bank officials continue to warn that rates have room to move higher before a possible slowdown. In Asia, Markets dove lower due to Wall Street’s overnight selloff after Powell’s hawkish commentary. Chinese markets lost momentum on the Chinese Health Commission’s statement that it must stick to current measures of its strict COVID-19 policy. This fallout was also the driver for the Caixin China General Services PMI contracting further in October. And the Philippines’ central bank announced a 75-basis-point rate hike two weeks ahead of its meeting – in step with the Fed – while Malaysia’s central bank raised its base rate by 25 bp. Elsewhere, Oil fell 2.28% while a stronger Dollar saw Gold end yesterday with a loos of over 1%.
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The S&P 500 closed 1.06% lower at a price of 3720.
The Dow Jones Industrial Average closed 146 points lower for a 0.46% loss at a price of 32,001.
The NASDAQ 100 closed 1.98% lower at a price of 10,690.
The Stoxx Europe 600 Index closed 0.93% lower.
Yesterday, the MSCI Asia Pacific Index fell 1.4%.
Yesterday, the Nikkei closed 0.05% lower at a price of 27,663.
The Bloomberg Dollar Spot Index closed 0.8% higher.
The Euro closed 0.6% lower at $0.9754.
The British Pound closed 1.5% lower at 1.1160.
The Japanese Yen fell 0.3% closing at $148.25.
Germany’s 10-year yield closed 13 basis points higher at 2.25%.
Britain’s 10-year yield closed 9 basis points higher at 3.50%.
US 10 Year Treasury closed 3 basis points higher at 4.14%.
West Texas Intermediate crude closed 2.28% lower at $87.75 a barrel.
Gold closed 1.04% lower at $1627.10 an ounce.
This morning on the Economic Front we have German Factory Orders at 7.00 am. This is followed by German, Euro-Zone and U.K Global Services PMI at 8.55 am, 9.00 am and 9.30 am respectively. Next, we have Euro-Zone PPI at 10.00 am. Finally, at 12.30 pm we have U.S. Non-Farm Payrolls including Average Earnings and the Unemployment Rate.
Cash S&P 500
With Fed Funds having increased by an epic 375 basis points cumulative hike for the year, we are now well above the neutral rate of 2.50%. We have not seen such a level on the Funds Rate since just before the bursting of the credit and housing bubble in 2007. The Fed had to say it still anticipates more rate hikes in order to continue to flex its inflation-fighting muscles, but it said pretty much the same thing in 2007 and the next thing you know circumstances changed and forced them to ease. With two-year yields surging above 5% yesterday it will not take long for circumstances to change as they are in danger of burying the economy given the level of debt in the system. Inflation is falling hard in my opinion but is still not been reflected in official data. You only have to look at the individual commodity charts to see how much they have fallen in the past six months. Another curious scenario is the fact that the VIX keeps falling every day despite the aggressive sell-off in both the NDX and S&P. The VIX closed at 25 last night. Given past experience the VIX should be at least 32+. I am still long and wrong the S&P from late Wednesday at 3797. The S&P has support from 3670/3690. I will be a buyer in this area with a 3655 tight ‘’Closing Stop’’ If I am taken long I will have a T/P level at 3725. Meanwhile I will lower my T/P level on my 3797 long position to 3813. If any of the above levels are hit I will be back with a new update for my Platinum Members.
No Change. I am still long at .9840 with the same .9755 tight ‘’Closing Stop’’. Ahead of NFP, I will now raise my T/P level to .9920.
March Dollar Index
The Dollar soared again yesterday, trading the whole of my sell range for a now 112.55 average short position. I will now raise my T/P level on this position to 112.05 while leaving my 113.45 ‘’Closing Stop’’ unchanged.
I had the wrong big figure on the DAX yesterday. I am sure you realised it should have been 13 and not 12. The DAX plan worked well with the market trading lower to my 13040-buy level, before rallying to my 13110 T/P level and I am now flat. The DAX has support below from 12900/12980. I will be a strong buyer in this area with a 12795 wider ‘’Closing Stop’’.
Despite the 75-basis point increase in UK Base Rate, the FTSE CLOSED HIGHER ON THE DAY. I am still flat and I will now raise my buy level to 7040/7120 with a higher 6975 ‘’Closing Stop’’.
Dow Rolling Contract
I am still long the Dow (32200) as the market had a nice 300-point rally off its afternoon low, to close above 32000. I will leave now raise my T/P level on this position to 32380 while leaving my 31885 ‘’Closing Stop’’ unchanged.
Cash NASDAQ 100
The NDX has now fallen over 7% since the post FOMC Statement high on Wednesday at 6.15 pm. This is an enormous move. Yesterday’s sell-off saw the whole of my buy range filled for a now 10745 average long position. I will now lower my T/P level to 10830 while leaving my 10545 ‘’Closing Stop’’ unchanged.
The Bund also traded the whole of yesterday’s buy range for a 137.20 long position. As I wanted to reduce my overall exposure, I covered this position at my 137.50 revised T/P level and I am now flat. The Bund has support below from 135.80/136.60 where I will again be a buyer with a wider 134.95 ‘’Closing Stop’’.
Gold Rolling Contract
After Gold sold off to my 1621 buy level we had a small rally, enabling me to cover this position at my revised 1630 T/P level. Gold has support from 1593/1608 where I will again be an aggressive buyer with a 1579 ‘’Closing Stop’’.
Silver Rolling Contract
No Change. I am still long at 20.05 the same 20.60 T/P level.