Indecision Rules—Recession Looms

Ulli Uncategorized Contact

[Chart courtesy of MarketWatch.com]

  1. Moving the markets

Despite the CPI turning out a bit “cooler” than expected, with the headline number printing +0.1% MoM and +5.0% YoY vs. 5.1% anticipated—and down from 6% YoY prior—the reaction was lukewarm at best.

The Fed’s favorite core CPI rose 0.4% MoM, in line with expectations, but it pushed the index up 5.6% YoY, up from a prior 5.5%, as ZH reported.

The market’s initial reaction was positive, yet after an early rally, the major indexes retreated, only to rebound at midday, after which a sudden decline across the board pushed all three of them into the red.

This kind of directional indecision appears to have been caused by the Fed’s release of the March minutes, which showed that officials were alarmed that the economy could slip into a mild recession later this year, with a potential recovery slated over the subsequent two years.

The Citi Economic Surprise index seems to confirm the fact that not all is well with the domestic economy, as the banking crisis, which is far from being over, has done its part to make the current environment appear to be not up to par.

Not helping the bulls to gain momentum were a couple of Fed mouthpieces singing from the same hymn sheet from a month ago that “policy makers have more work to do,” and “there are good reasons to think that policy may have to tighten more to bring inflation down,” along similar bon mots.

None of this is new, as the Fed had made it clear last year that rate hikes for “higher and longer” would be on the agenda, but that theme has been lost on traders and algos, who refuse to believe that a pause is not on the current horizon.

Bond yields went on a wild ride, ended the session just about unchanged, but the 10-year was yanked off its high and back below the 4% level. The US Dollar dove after the dovish CPI print, while Gold rode its own rollercoaster but managed to add another 0.45% to its impressive YTD gains.

Tomorrow, it’s up to the Producer Price Index (PPI) to determine short-term market direction.  

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Going Nowhere Ahead Of The CPI Report

Ulli Uncategorized Contact

[Chart courtesy of MarketWatch.com]

  1. Moving the markets

Despite the Dow and the S&P bouncing above their respective unchanged lines throughout the session, in the end not much was gained, as traders tried to elude possible negative consequences ahead of key inflation data.

It’s worth noting that tomorrow’s CPI and Thursday’s PPI report are the last critical inflation data points before the Fed meets next, which will be on May 3rd.

At that point, they will re-evaluate their fight to control inflation via rate hikes, whether their current policy is on target, or if it needs to be adjusted. The latter is what traders are looking for, while hoping that any adjustment will tilt towards a dovish stance, which will then give a boost to equities—at least in theory.

Also on deck is the earnings season, with banks starting to post their report cards this coming Friday, so traders are eager to find out if last month’s banking crisis impeded their bottom lines.

Bond yields inched higher for the 3rd straight day, while the odds of a 0.25% hike in May stayed around the 70% level. The US Dollar dropped, and Gold popped another +0.80% to close at $2,020.

Today’s activity seemed dull and uninspiring, but the next two days could change that in a hurry.

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Climbing Out Of A Hole

Ulli Market Commentary Contact

[Chart courtesy of MarketWatch.com]

  1. Moving the markets

Friday’s March payroll report was largely in line with expectations, as 236k new jobs were created, which was slightly above the 230k anticipated, while the unemployment rate dipped from 3.6% to 3.5%.

That number might compel the Fed to remain hawkish for longer with the May Rate-Hike odds now having climbed from 50% to over 70%, which had bond yields spiking first before fading.

We started the day on a weak note, as the chart above shows, but in the end a slow long grind higher, assisted by a short squeeze, pushed the major indexes back to their respective unchanged lines—with not much lost or gained.

Traders seemed to be on edge and are staring at this week’s upcoming key inflation data. Wednesday, the CPI number is on deck, which is followed Thursday by the PPI data, both of which will be key in determining what the Fed’s next move might be. Will it be a pause and an end to its hiking campaign, or will they continue with a more moderate hiking schedule? My guess is the latter.

We saw a bit of a reversal from last week’s action in that Bond yields spiked, the US Dollar bounced back, rate-hike odds rose, and gold came off its lofty high but closed above its $2k level.

All eyes are now on the release of the inflation numbers, which likely will cause traders and algos to spring back into action.

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Weekly StatSheet For The ETF Tracker Newsletter – Updated Through 04/06/2023

Ulli ETF StatSheet Contact

ETF Data updated through Thursday, April 6, 2023

Methodology/Use of this StatSheet:

1. From the universe of over 1,800 ETFs, I have selected only those with a trading volume of over $5 million per day (HV ETFs), so that liquidity and a small bid/ask spread are assured.

2. Trend Tracking Indexes (TTIs)

Buy or Sell decisions for Domestic and International ETFs (section 1 and 2), are made based on the respective TTI and its position either above or below its long-term M/A (Moving Average). A crossing of the trend line from below accompanied by some staying power above constitutes a “Buy” signal. Conversely, a clear break below the line constitutes a “Sell” signal. Additionally, I use a 12% trailing stop loss on all positions in these categories to control downside risk.

3. All other investment arenas do not have a TTI and should be traded based on the position of the individual ETF relative to its own respective trend line (%M/A). That’s why those signals are referred to as a “Selective Buy.” In other words, if an ETF crosses its own trendline to the upside, a “Buy” signal is generated. Here too, I recommend trailing sell stop of 12%, or less, depending on your risk tolerance.

If you are unfamiliar with some of the terminology, please see Glossary of Terms and new subscriber information in section 9.     

1. DOMESTIC EQUITY ETFs: BUY — since 12/01/2022

Click on chart to enlarge

Our main directional indicator, the Domestic Trend Tracking Index (TTI-green line in the above chart) has reclaimed its long-term trend line (red) by +1.19% and remains in “Buy” mode for the time being.

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Battling Back

Ulli Market Commentary Contact

[Chart courtesy of MarketWatch.com]

  1. Moving the markets

After a red opening, the major indexes spent the remainder of the session battling back and managed a green close, despite much anxiety ahead of tomorrow’s release of the March jobs report. Since the exchanges are closed on Friday, there will be no market reaction until Monday.

Whenever the Bureau of Labor Statistics (BLS) revises data, you never know what to expect. Such was the case today when revised initial jobless claims showed a far worse picture than the original version. This simply represents another data point in a lengthy list this week that demonstrates anything but a growing economy.

As far as Fed rate hikes are concerned, the current odds are 50% of a 0.25% hike in May. The market also now expects more than 3 rate cuts for the remainder of 2023. To me, all of this is nothing more than a coin flip.

Bond yields were down a tad from yesterday, as the 5-year and 10-year dropped to their lowest close since September 2022, as ZeroHedge pointed out. With that, it came as no surprise that mortgage rates softened, after now having tumbled for the 4th straight week.

The US Dollar dropped, while Gold surged and notched its second highest weekly close ever.

With the markets being closed tomorrow, there will be no market commentary, but I will post the weekly StatSheet on Friday morning.

Enjoy the Easter weekend.

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Rangebound

Ulli Market Commentary Contact

[Chart courtesy of MarketWatch.com]

  1. Moving the markets

Continued weak economic data points soured traders’ motivation to drive the indexes higher. As a result, the Nasdaq recorded its 3rd straight loss, while only the Dow was able to eke out a green close.

The latest ADP private payroll report was another disappointment, after yesterday’s dreadful data, because it showed slowing job growth. The Services survey also took a dive from 55.1 to 51.2, a huge dip considering the expectations of 54.4.

What a difference a month makes. As ZH pointed out, during February, the US Macro Data Surprise Index hovered solidly in green territory, but now this indicator is deeply entrenched in the red, meaning that the much-ballyhooed soft landing may not be playing out as anticipated.

And the Fed’s Loretta Mester was talking out of both sides of her mouth:

Yesterday – MESTER: FED WILL NEED TO GET RATES UP ‘A LITTLE BIT MORE’, SEES FED-FUNDS RATE ABOVE 5%, HOLDING FOR SOME TIME

Today – MESTER: TOO SOON TO SAY WHETHER FED WILL RAISE RATES IN MAY, HOPING WE DON’T TIGHTEN UNTIL SOMETHING BREAKS

Ah yes, a classic case of walking back the talk and shifting from hawkish to dovish.

Given the weakening economic environment, the markets are now counting on lower rates ahead with a Terminal Rate of 4.9% in May, which is to be followed by 4 rate cuts to 4% by the end of this year. Of course, this is not chiseled in stone, and a host of events could derail these assumptions.   

Bond yields dumped after the ADP release, with the 2-year first retreating to 3.64% before rebounding to 3.8%. Despite the overall dovish sentiment, the US Dollar bounced back moderately, as Gold surpassed $2,030 but pulled back to end the session at $2,037, essentially unchanged.

Tomorrow will be the last trading day of this week, due to markets being closed on Good Friday.   

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