The stock market is showing signs of life this year we have another hurdle to overcome as the next Fed’s policy statement on Wednesday will be closely watched by Wall Street. Six months ago there was a feel that the Fed might have to march rates to 7% but inflation numbers are abating and the supply chain is beginning to normalize. China is another potential positive as three years of COVID lockdowns dissipate and already we are seeing the Chinese consumer show up in Macau casinos to spend their money.
I doubt we get any surprises from the Fed which means +25bps on Wednesday and maybe another 25bps at the March 22nd meeting. In the chart below, we can see the S&P 500 push through the green trend line while the momentum indicators at the bottom of the chart are now pointed higher. Trend lines don’t always have significance but this one has lasted a year so holding above it has meaning.
Downtrends weaken when they take out previous highs and the last one was on 12/10 at $411 so that is the next resistance level for the S&P 500. The Dow, NASDAQ and Russell 2000 are all showing the same chart pattern so this is not an isolated situation and there are many individual stocks catching a bid that have fallen over 50%+ during the last 18 months.
The short-term charts are getting overbought so I would expect some pullback next week and I want to see this trend line hold to maintain a bullish outlook. If we see the S&P fall through the 12/22 low at $375 then this rally was a head-fake and we should see an acceleration lower. As I have mentioned in previous blog posts, these next 1-2 weeks of trading will set the tone for 2023.
The Yield Curve
I appreciate the credit refi bubble that is ahead of us as there is $10T in publicly traded debt that needs to be refinanced in the next few years but so do the central banks. Meaning, they can only raise rates so far before inducing a central bank solvency cycle. The Fed is based in Washington DC so it has political entrails and the politicians will not like how the budget will be impacted by interest payments.
Fortunately for the Fed, long bonds remain below 4% and the corporate debt markets have looked healthy this year as new issuance is oversubscribed. Treasury auctions have been also well bid as the dollar strength makes US yields attractive to oversea investors. The high point in the chart below shows a peak rate within six months and lower thereafter. Perhaps, the Fed will follow the lead of the bond market on Wednesday. The grey line represents yields from one month ago and you can see the change in the long end implies cooling inflation.
Economic Data
- Initial jobless claims continue to be at historically low levels and came in at 186k this week. Unfortunately, the labor participation rate remains at low levels as the US population ages and less people are motivated to return to work post-COVID. As you can see, this is not a new phenomena.
- Durable Goods Orders jumped 5.6% but new orders for non-defense capital goods excluding aircraft, fell 0.2%. “Taken in tandem with the contraction in equipment spending in today’s GDP report, this is further evidence that the manufacturing recession is under way,” said Wells Fargo economist Tim Quinlan.
- Pending home sales in December rose 2.5% compared to November and the NAR said “Mortgage rates are the dominant factor driving home sales, and recent declines in rates are clearly helping to stabilize the market.”
- Personal Consumption Expenditures (PCE) rose 5% (YOY) headline and 4.4% core. Food prices grew 11.2% (YOY) and energy prices rose 6.9%. This is the Fed’s favorite inflation metric and it is declining.
- Q4 GDP rose 2.9% and not bad for a quarter where most thought the world was going to fall apart. Below we can see that housing dragged in this last quarter but mortgage rates stabilizing is already helping the residential real estate market.
- The Bank of Canada raised rates by 25 bps to 4.50% and indicated they will pause (for now).
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