The Morning Call
1/9/23
The
Market
Technical
The S&P had a
smokin’ day on Friday, bouncing off that 38.2% Fibonacci retracement level and challenging
its 100 DMA (if it remains there through the close on Tuesday, it will reset
from resistance to support). So, now the
key is follow through. If it maintains
its upward momentum then the next resistance levels are obvious (1) the 200 DMA
[~3996], (2) the upper boundary of its short-term downtrend [~4062] and (3) the
23.6% Fibonacci retracement level [~4200].
If it fails to successfully challenge the 100 DMA then support exists at
(1) that 38.2% Fibonacci retracement level [ [3817], (2) the lower boundary of
its short-term downtrend [~3544] and (3) the 50% Fibonacci retracement level
[~3507]. Patience. Wait for the resolution
of the S&P’s challenge of its 100 DMA.
TLT had an even
more impressive day on Friday than the S&P.
It (1) bounced off the lower boundary of its intermediate term downtrend
and is challenging both (2) the upper boundary of its very short-term downtrend
and (3) its 100 DMA. However, like the
S&P, we have to let our time and distance discipline run its course---so we
wait for the close on Tuesday to see if these challenges are successful. From the fundamental point of view, if the
Market’s interpretation of Friday’s economic data (see below) proves correct
(i.e., the Fed is close to pivoting), then this pin action makes sense.
As I noted last
week, GLD has been signaling that the odds were rising that a Fed pivot was
coming. That clearly makes sense if both
interest rates and the dollar are falling. Of course, the gold market is funky,
so its signals are not always accurate.
But clearly, in this case, it lends support to that thesis.
The dollar continued
its fall, having reset both DMAs from support to resistance. On the other hand, it has (1) remained within
short, intermediate and long-term uptrends and (2) left those three huge gaps
down opens which need to be filled. Still,
it has been potentially signaling a change in the economy/Fed policy. Let’s see how it handles the lower boundary of
its short-term uptrend (next support level).
Friday in the
charts.
https://www.zerohedge.com/markets/slowing-salaries-slumping-services-spark-stockbond-buying-panic
Fundamental
Headlines
The
Economy
Last Week Review
Drinks
all around. The stats in both the US and
overseas were upbeat last week (in the US the primary indicators were neutral [one
plus, one minus]). However, it was the
data pattern in the US that proved encouraging: positive overall numbers, but particular
stats even more upbeat---nonfarm payrolls up but wage growth weaker than
expected, i.e., a goldilocks scenario for the Fed: economy improving,
employment strong, but wages not spiraling out of control (the Fed’s stated chief
concern).
So,
not only does it appear that the economy is passed peak inflation but also there
is now the prospect that wage inflation has peaked. That begs the question: will the Fed use this unanticipated positive
as an excuse to back off the monetary tightening process?
At
the moment, it is still too soon to know the answer (one data point does not a
trend make). But we knew that this point
would come sooner or later---data would come that suggested that the Fed was
achieving their goal; raising the twin risks that it would either use the
positive number as an excuse to fold its tent and go home too soon (forcing it
to have return to the inflation fight battlefield later) or maintain tight monetary
policy for too long (and push the economy into recession).
You
know what I think---door number one. I believe this crew in the Fed is either too
cowardly or so convinced of its ability to ‘fine tune’ the economy (hubris, hubris,
hubris) to go through with the necessary policies to push the inflation rate
back to two per cent.
That
said, there is a door number three: I do believe that the risk to this scenario
is that the Fed has lucked out short term---that, in fact, inflation, in particular,
wage inflation has peaked short term and that we could see a period of
declining inflation. Not a return to two
percent inflation mind you. But headed that
way for a long enough period of time that the worst could be over for the
Market short to intermediate term.
The
analyst agrees.
https://www.zerohedge.com/the-market-ear/tme-weekend-smells-soft-landing
Regrettably,
the economy is too deep in the doo doo for the ‘lucked out’ scenario to prevail
long term. Years of fiscal profligacy
have left us with a debt to GDP ratio far in excess of the boundary marked by
Rogoff and Reinhart as the level at which the servicing of too much debt
negatively impacts the growth rate of the economy---last week’s passage a
grotesque pork laden 2023 budget bill exemplifies the problem. And years of irresponsible monetary expansion
have led to the misallocation of resources and the mispricing of risk.
Correcting those self-inflicted wounds won’t be easy. It will take years of fiscal and monetary
restraint to do so. And that would mean
less fiscal stimulus and interest rates staying higher for longer than many now
expect.
Bottom
line: (1) one week’s data does not a trend make, (2) we knew the day would come
when stats would start trending in the Fed’s favor (3) that doesn’t mean the
Fed is any better at transitioning to a neutral monetary policy than it has
ever been, so (4) the ‘lucked out’ scenario in not my forecast but (5) we are
at the point where we have to be open to the possibility.
Headlines
The
Economy
US
International
November German
industrial production rose 0.2% versus estimates of +0.1%.
Other
The
Fed
How many times
have I lamented the income inequality generated by Fed monetary policy? This article addresses that problem and the consequences
of solving it.
https://www.zerohedge.com/markets/fed-trying-wean-markets-monetary-policy
Bottom
line
Goldman looks at
Q4 earnings.
News on Stocks in Our Portfolios
What
I am reading today
Hangover
cures.
https://www.wired.com/story/wired-tested-miracle-hangover-cures/
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