U.S Equity Markets closed mixed after another volatile trading session. I am seeing plenty of positive divergences at last nights close as crucially the McClellan Oscillator improved from Monday’s -420 print, closing last night at -354. Markets encountered a choppy day of trading, giving away most of the earlier gains. Stronger domestic economic data and concerns about potential U.K. and Euro-Zone fiscal policy played into the day’s turnaround. September’s Consumer Confidence and New Home Sale readings for August both surprised to the upside. However, additional data showed that the housing market continued to sharply decline in July, with further pricing declines expected. Meanwhile, multiple Federal Reserve speakers continue to reiterate that it would be far costlier to do too little than too much with further interest rate action. The real Federal-Funds rate could turn positive in February. The number is the difference between the current Federal-Funds Rate and inflation growth. So, when inflation is higher, the real fed-funds rate will be negative, and when inflation is lower, the real rate will turn positive. Fed Chairman Jerome Powell said the real fed-funds rate needs to get back into positive territory for a change in policy direction. In Fed speak, that means the central bank is intent on raising interest rates until it reaches that key level. He also said that getting there could mean more pain for the economy. So, following this most recent hike – and the comments on slowing economic growth – I wanted to see how this will affect the long-term outlook of the real fed-funds rate. And based on what I found, the rate could turn positive sooner than previous expectations. Long term, that would bode well for the economy and the S&P 500 Index. I looked at a few different scenarios of how inflation could play out over the next year. I wanted to observe it alongside the anticipated policy path and relative to the difficult inflation-growth comparisons we are facing. 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. So, I looked at inflation throughout history to set parameters for our analysis. Pre-pandemic, from 2017 through 2019, the lowest month-over-month (“MOM”) inflation change was a drop of 0.1%. The highest MOM inflation growth was 0.5%. Here, after initially slowing, inflation growth begins to accelerate once more in July. This would happen as the year-over-year comparisons get easier after June. If inflation came anywhere close to this projection, the Fed could increase its target interest-rate level closer to 5.00% or even 6.00%. That means the economic outlook would worsen. And just like the previous scenario, the real fed-funds rate does get closer to the target of zero, but the timeline remains unchanged. This represents the worst-case scenario. So now that we have our best- and worst-case outcomes, let’s look at what would happen based on a return to typical MOM cost growth. Pre-pandemic, the average MOM inflation growth was 0.2%. In this event, the real Fed-Funds rate would turn positive in March of next year while inflation growth would actually hit the 2% target by June. This scenario would improve our timeline of reaching a positive real fed-funds rate by about one month. But if we wanted to account for the post-pandemic economic landscape, we should also model the five-year rolling average for MOM inflation growth of 0.3%. However, in both of these last two scenarios, the most likely time frame for peak interest rates would be right around the end of the first quarter to the beginning of the second quarter – or about six months out. 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 Index, seven of the 11 sectors finished lower. European Markets closed lower. Markets were mostly lower on the day as investors’ attention turned to the volatile bond and foreign exchange markets. The Dollar gave up ground to regional currencies after a record fall for the British pound. The Bank of England said it “will not hesitate” to raise rates if needed. European Central Bank Chief Philip Lane called for balanced policies in an interview with Der Standard to avoid a wage price spiral and amid inflationary pressures, while German Minister Robert Habeck said that an extension of the country’s nuclear power production was likely. In Asia, Regional currencies felt marginal relief as the Dollar saw weakness for the first time in weeks. Bloomberg’s early economic indicators for September show that China faces fresh threats from a global slowdown. The World Bank slashed its China economic growth forecasts for 2022 to 2.8% from previous forecast of 4% to 5% made in April and 8.1% last year, while Taiwan’s central bank governor Yang Chin-long said the bank is closely monitoring foreign outflows and will consider control measures if significant foreign outflows continue. Elsewhere, Oil closed 2.28% higher while Gold finished the session higher by 0.15%
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Equities
The S&P 500 closed 0.21% lower at a price of 3647.
The Dow Jones Industrial Average closed 125 points lower for a 0.43% loss at a price of 29,134.
The NASDAQ 100 closed 0.16% higher at a price of 11,271
The Stoxx Europe 600 Index closed 0.13% lower.
Yesterday, the MSCI Asia Pacific Index fell 0.2%.
Yesterday, the Nikkei closed 0.53% higher at a price of 26,571.
Currencies
The Bloomberg Dollar Spot Index closed 0.3% higher.
The Euro closed 0.3% lower at $0.9582.
The British Pound closed 0.1% higher at 1.0709.
The Japanese Yen fell 0.2% closing at $144.84.
Bonds
Germany’s 10-year yield closed 12 basis points higher at 2.24%.
Britain’s 10-year yield closed 20 basis points higher at 4.48%.
US 10 Year Treasury closed 7 basis points higher at 3.95%.
Commodities
West Texas Intermediate crude closed 2.28% higher at $77.85 a barrel.
Gold closed 0.15% higher at $1633.10 an ounce.
This morning on the Economic Front we have another speech from ECB President Lagarde at 8.15 am. Next, we have U.S. Durable MBA Mortgage Applications at 12.00 pm and Wholesale Inventories at 1.30 pm. Finally, we have Pending Home Sales at 3.00 pm and a speech from Fed Chair Powell at 3.15 pm.
Cash S&P 500
The S&P having hit an afternoon high at 3719, fell almost 100 Handles to hit a new-year-to-date low of 3625 before having a small rally into the close. This is the first session in a couple of weeks where both the McClellan Oscillator and $NYMO both improved. The big question was today the ultimate low or are we going to test the next key support level at 3580/3600 first? With the Dollar now matching its 3rd largest ever Monthly RSI extension with the two previous examples reversing from there, the odds that we are close to a Dollar reversal is increasing. Although I never thought the Dollar would hit 114, I still firmly believe that intervention is close at hand. Mortgage rates hitting 7% yesterday will put pressure on home owners. The Fed cannot afford rates to rise much further or they will crash the economy. As I said yesterday I have no respect anymore for the Fed as they have no idea what they are doing, It will interesting to see what words of wisdom Powell says this afternoon at 3.15 pm. I am still long the S&P at 3733 with no stop and no T/P level. I will continue to be an aggressive buyer on any further dip lower to 3580/3605 with no stop. If I am taken long at this second buy level I will have a T/P level at 3670.
EUR/USD
I am certainly wrong on my 1.0060 long Euro position. Given the number of points made this month, I will continue to hold this position with no stop or T/P level for now. The Euro will have strong resistance at .9900 and any move to this level will see me reduce my exposure as I want to try and be flat ahead of Friday’s month-end.
March Dollar Index
No Change as I need a miracle. I am still short at an average rate of 108.90 with the same 108.10 T/P level.
Cash DAX
Just before the New York close the DAX hit my buy level and I am now long at 12070. I will add to this position at 11930 while lowering my T/P level to 12190. Meanwhile, I will leave my 11795 ‘’Closing Stop’’ unchanged.
Cash FTSE
Unfortunately, I was stopped out of my 7090 long position at 6995 and I am still flat. Despite getting stopped the price action for the FTSE is still positive given the massive moves in both Sterling and Gilt Yields. Today, I will again be a buyer on any dip lower to 6880/6960 with a wider 6795 ‘’Closing Stop’’.
Dow Rolling Contract
My latest long 29240 Dow position worked well with the market rallying to my 29550 T/P level yesterday morning and I am still flat. Subsequently, the Dow got slammed, making a new low for the year below 29000. The 14-Day RSI for the Dow closed below 25 last night which is the lowest close since the COVID crash. The Dow has support from 28800/29050 where I will again be a buyer with a wider 28595 wider ‘’Closing Stop’’.
Cash NASDAQ 100
No Change. I am still long the NDX at 11390 as the market just missed my 11520 T/P level. Today, I will leave my T/P level unchanged. I will add to this position at 11150 with no stop.
December BUND
I was lucky yesterday as the Bund rallied to my 139.00 T/P level on my latest 138.10 long position before falling over 200 points into the close. The Bund is now posting one of most oversold readings ever. Today, I will again be a buyer on any further dip to 135.80/136.60 with a 134.95 ‘’Closing Stop’’.
Gold Rolling Contract
No Change. I am still long Gold at 1646 with the same 1629 ‘’Closing Stop’’. I will now lower my T/P level to 1650.
Silver Rolling Contract
No Change. I am still long Silver at 18.40 with the same 19.60 T/P level and no stop. If this view changes I will come back with an update for my Platinum Members.
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