The Morning Call
2/6/23
The
Market
Technical
Friday’s drubbing
notwithstanding, the S&P had a good week, (1) resetting its short-term
downtrend to a trading range, (2) making a making a higher high, (3) which in
turn marked a new very short-term uptrend.
On the negative side, it touched the 23.6% Fibonacci retracement level
intraday and backed off. However, as I
note below, the jobs report which set off Friday’s downside reversal was more
about data revisions than real numbers.
So, I am going to withhold judgment about the strength/longevity of this
move. Resistance exists at the
aforementioned Fibonacci retracement level (~4200) as well as the newly set
upper boundary of a short term trading range (~4325).
The long bond also
suffered a violent reaction to Friday’s employment data. The bad news is that if halted a potential
challenge of its 200 DMA and failed to make a new higher high. The good news is that it made a big gap down
open which will need to be filled. As I
mentioned above, I think that there are enough questions about the quality of
jobs stats that Friday’s pin action may prove to be more about emotions than
economics. So, a reversal would not be
surprising to me---of course, I could be wrong (and often am).
As you would
expect with both interest rates and the dollar (see below) spiking, gold got
hammered on Friday. But like TLT
(UUP) it made a major gap down (up)
open. Again, I am not sure how much
credence to give Friday’s price action.
So, as always, follow though.
On a gap up open,
the dollar pushed back through the lower boundary of its short term uptrend on
Friday, having not really convincingly negated that trend. Like stocks, bonds and gold, I am on hold
with respect to the meaning (if any) of Friday’s price movement.
Dollar reversal?
https://www.zerohedge.com/the-market-ear/dollar-reversal-breaking-peoples-dreams
Friday in the
charts.
https://www.zerohedge.com/markets/nasdaq-soars-best-start-1975-after-jay-jobs-outperform
Hedge fund
capitulation.
Market instability
growing.
Something is about
to change.
Are we at a top?
https://www.zerohedge.com/the-market-ear/did-they-pop-balloon-top
Fundamental
Headlines
The
Economy
Last Week Review
Last
week the stats in the US were slightly upbeat though the negative primary
indicators outnumbered the positive three to two. Overseas, the data was
overwhelmingly positive.
Of
course, there were two big news items of the week:
(1)
Powell’s presser in which he sounded much more dovish than many expected. I am assuming that his change in narrative
was driven by the facts on the ground---an improving economy accompanied by
moderating inflation. This keeps alive
the hope for the ‘Fed lucked out’ scenario.
However,
as I keep repeating, a decline in the inflation rate is not the same as a
return to 2% inflation. Which means that
there is a lot more work to be done before the ‘lucked out’ scenario becomes
history.
(2)
the blow out jobs report on Friday. But
alas, it apparently was the result of seasonal adjustments and other changes in
the compilation of the data versus a truly strong labor market.
https://www.zerohedge.com/economics/what-was-behind-todays-wow-wow-wow-jobs-report
Bottom
line: my opinion hasn’t change…. 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. 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.
Hopefully, the Fed
will view the improving economy as a reason to continue to unwind its balance
sheet. If we/the Fed get ‘lucky’, then
the Markets will hopefully stay reasonably calm as the Fed pursues its QT. If not, then expect turmoil and the Fed
‘chickens out’. Short term, whether the
Fed ‘chickens out’ or ‘lucks out’, stocks will likely continue to enjoy the
current push higher.
https://www.aier.org/article/should-the-fed-stop-tightening/
This
analyst agrees that the Fed should stay tough.
https://www.ft.com/content/a40baecd-6ba7-465a-9661-017cb17d0bf1
David
Stockman believes that the Fed should cease its activist role.
https://www.zerohedge.com/markets/stockman-what-inflation-would-look-true-free-market-economy
Longer
term, I am not so positive---meaning continuing irresponsible fiscal and monetary
policies, i.e., slower secular growth and higher secular inflation.
Governments won’t
let inflation go away.
Jeffrey Snider thinks that not only has the
Fed done enough, but it has done too much and recession will be the result.
The National Federation
of Independent Business survey agrees.
https://www.zerohedge.com/markets/nfib-survey-suggests-recession-coming
Headlines
The
Economy
US
International
December German factory
orders were up 3.2% versus estimates of +2.0%; the January construction PMI was
43.3 versus 43.0.
December EU retail
sales fell 2.7% versus expectations of -2.5%; the January construction PMI was
46.1 versus 43.1.
Other
Update on big four economic indicators.
Mortgage rates fall for
fourth week in a row.
https://www.cnn.com/2023/02/02/homes/mortgage-rates-february-2/index.html
Bottom line
Bear markets bring fortunes.
Everybody remains bearish.
The latest from BofA.
Paul Singer is not very positive.
What
I am reading today
The
Chinese ‘spy balloon’ likely a manufactured story.
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