U.S. Equity Markets finished Monday higher led again by the 1.31% gain in the Dow. Markets ended higher following a rather quiet day, with investors awaiting Tuesday’s Mid Term elections. Despite uncertainty around any impacts that politics may have on the markets, investors see potential upside in lower yields, growing optimism of a “soft landing,” and peak Federal Reserve tightening. There were hardships in the tech sector, as Apple (AAPL) announced on Sunday that COVID-19 restrictions in China have impacted the production of its iPhone 14 Pro. However, this was already largely anticipated by investors. Facebook parent Meta Platforms (META) is also reportedly set to announced large-scale layoffs. The labour market is not as strong as you think. Last week, Federal Reserve Chairman Jerome Powell told us the central bank is trying to kill the economy. So far, it has not seen the fruits of its labour. Including last Wednesday’s 0.75% interest-rate increase, the Fed has raised the target Federal Funds Rate from a range of 0% to 0.25% in March to 3.75% to 4% today. That has caused the conventional 30-year mortgage rate to more than double this year alone. It has gone from less than 3% at the beginning of 2022 to more than 7% today. But Powell has a problem. He said the labour market remains too strong. He is seeking below-trend economic growth compared to last year’s 5.7% gain. In other words, Powell and the rest of the rate-setting Federal Open Market Committee want to see economic output below the 2.3% pre-pandemic average. Policymakers are estimating the change will boost the number of available workers. This, in turn, would bring the supply-and-demand picture back into balance for the labour market. So, the Fed wants to see a higher unemployment rate, not a lower one. Based on the headline October establishment survey figures, the unemployment rate currently sits at 3.7% compared to the pre-pandemic low of 3.5%. That is not much of a rebound. But the central bank may be focused on the wrong number. Because the Household Employment numbers tell a much different story. Based on that data, rate hikes are having the intended effect. In fact, they even signal the central bank could be going too far. Any pullback by the Fed in its rate-hike plans would bode well for the outlook of risk assets like stocks and the S&P 500 Index. Employment figures released Friday continue to show us one thing: They are not a reliable indicator of the state of the current economy. At the end of last week, U.S. businesses reported strong hiring and wage increases in October, but the unemployment rate climbed. Non-Farm payrolls increased by 261,000 last month according to the U.S. Department of Labour’s establishment survey. But the Household Survey continued to contradict any positive sentiment, showing a decline in employment by 328,000. When you dig into the jobs report even further, you start to see something else is happening. If you compare the two since March – the same time the Federal Reserve started to hike rates – a clear divergence in trend appears. The difference between the two back through March is about 2.3 million jobs. In other words, the Household Survey shows that the country has not really gained any jobs over the last two quarters.
March to October difference:
Establishment Survey: +2.452 million
Household Survey: +150,000
These figures paint a darker picture of the current state of the economy. Thought of another way, the Fed could be overtightening monetary policy. Remember, the central bank has told us it will keep raising interest rates until the labour supply-and-demand picture comes back into balance. The lack of consensus among multiple data points suggests there is either still a long way to go until the picture evens out or our central bank is about to make a huge policy mistake. If the establishment numbers are right, then it implies interest rates will keep rising. But if the household data is correct, continued rate hikes could bring the economy to its knees. Regardless, the Fed will be looking for signs of an economic downturn in the next few months. If these underlying signs of an economic downturn start to seep to the surface in the next few months, that could be a sign that rate-hike policy easing is headed our way. As this happens, it will boost investor confidence – both on Main Street and Wall Street. The dynamic will encourage consumers to stop saving and start spending, driving institutional investors to put money back to work in risk assets like stocks. Within the S&P 500 Index, eight of the 11 sectors finished higher. European Markets were mixed. Markets ended mixed following a volatile trading day. Europe was focused on the meeting of Euro-Zone Finance Ministers, as the region attempts to finalise energy support plans in the midst of a looming recession. In the U.K., Chancellor Jeremy Hunt is reportedly set to outline further tax hikes and spending cuts following the Bank of England’s recession warning. The week ahead is slated with a slew of speeches from European Central Bank officials, as well as reports on Euro-Zone Retail Sales and German inflation data. In Asia, Markets ended the day up, though investors weathered negative sentiment over the weekend, with weaker-than-expected trade data, further COVID-19 outbreaks, and reports that Beijing would continue its zero-COVID policies. Indonesia’s economy accelerated in the third quarter. And Philippine inflation and a weakening currency has spurred talks of an off-cycle rate hike. Elsewhere, Oil fell 0.70% while Gold closed flat after a quiet session.
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The S&P 500 closed 0.98% higher at a price of 3807.
The Dow Jones Industrial Average closed 425 points higher for a 1.31% gain at a price of 32,829.
The NASDAQ 100 closed 1.11% higher at a price of 10,977.
The Stoxx Europe 600 Index closed 0.33% higher.
Yesterday, the MSCI Asia Pacific Index rose 0.9%.
Yesterday, the Nikkei closed 1.21% higher at a price of 27,527.
The Bloomberg Dollar Spot Index closed 0.7% lower.
The Euro closed 0.6% higher at $1.0020.
The British Pound closed 1.2% higher at 1.1519.
The Japanese Yen rose 0.1% closing at $146.53.
Germany’s 10-year yield closed 4 basis points higher at 2.34%.
Britain’s 10-year yield closed 9 basis points higher at 3.63%.
US 10 Year Treasury closed 6 basis points higher at 4.22%.
West Texas Intermediate crude closed 0.70% lower at $91.20 a barrel.
Gold closed 0.08% lower at $1674.10 an ounce.
This morning on the Economic Front we have Euro-Zone Retail Sales at 10.00 am. This is followed by U.S. NFIB Business Optimism at 11.00 am. Finally, we have a Three-Year Treasury Auction at 6.00 pm.
Cash S&P 500
Despite higher Bond Yields the S&P tagged on 1% yesterday. This move higher saw the S&P close over its 50 Day MA (3799) which is no surprise given the fact that the Dow has surged nearly 4000 points in the past four weeks. Just before the close the S&P hit my 3813 T/P level on Wednesday’s 3797 average long position and I am now flat. With Mid Term elections today, results will not be out until overnight Tuesday/Wednesday. There is no doubt that depending on the results we will see a big gap move tomorrow morning when we wake up. The S&P has short-term support from 3762/3782 where I will be a strong buyer with a 3749 ‘’Closing Stop’’. One market that has totally confused me over the past three weeks is the VIX. Last night, was the 16 consecutive red candle on the VIX which is insane given the fact that during this period we have has some large sell-offs in the S&P and NDX. With the VIX closing last night at 24.47, I would have expected the S&P to be trading close to 4100. The next spike in the VIX could coincide with a large move lower in the S&P and we need to be conscious of this fact ahead of the elections today and CPI on Thursday. Any move in the S&P to the 4100 area will see me look to put on a macro short position.
The Euro missed my .9880 buy level by 20 points before rallying over 100 points and I am still flat. The price action in the Euro has changed since Thursday with dips getting bought for the first time in many weeks. I will now raise my buy level to .9900/.9970 with a higher .9835 ‘’Closing Stop’’.
March Dollar Index
Friday’s 1.9% fall in the Dollar was the largest intra-day fall in seven years. Yesterday, we saw some follow through as the Dollar closed a further 0.7% lower. I am still flat. I will now lower my sell level to 110.40/111.10 with a 112.05 ‘’Closing Stop’’.
The DAX tagged its 200 Day MA before having a small sell-off into the New York close. I am still flat and reluctant to chase the market higher. Given the positive price action I also do not want to be a seller at current prices. Today, I will leave my 13280/13360 buy level unchanged with the same 13195 ‘’Closing Stop’’.
The ramp higher in Sterling saw the FTSE trade heavy for most of yesterday’s session. The FTSE sold off into the New York close, hitting my 7260 buy level. I will add to this position at 7190 while leaving my 7135 ‘’Closing Stop’’ unchanged. I will now lower my T/P level to 7305 and if any of the above levels are hit I will be back with a new update for my Platinum Members.
Dow Rolling Contract
Wow!! As mentioned above the Dow has surged over 4000 points since last month’s CPI release. This aggressive move higher saw the Dow close above its 200 Day Moving Average (32560). This level should attract buying on any initial sell-off. I will now move my buy level higher to 32350/32600 with a tight 32175 ‘’Closing Stop’’.
Cash NASDAQ 100
Frustratingly, the NDX missed my buy level by 30 points before eventually catching a bid, to close higher by 1.11%. Ahead of the Mid Terms I will not chase the NDX higher, leaving my 10630/10780 buy level unchanged with the same 10545 ‘’Closing Stop’’.
My Bund plan worked well as the market sold off to my 136.20 buy level before rallying to my revised 137.00 T/P level and I am now flat. The Bund has support from 135.00/135.80 where I will again be a buyer with a lower 133.95 ‘’Closing Stop’’.
Gold Rolling Contract
Gold consolidated Friday’s gains and I am still flat. I will not chase the market higher leaving my 1640/1655 buy level unchanged with the same 1629 ‘’Closing Stop’’.
Silver Rolling Contract
Silver saw small profit-taking yesterday after Friday’s 7% surge. This small move lower saw my 20.40 buy level triggered. I am still long and I will add to this position at 19.70 with no stop. I will now lower my T/P level to 21.10.