1. Moving the markets

The major indexes shed some more of their recent gains during this first day of a Holiday shortened trading week. Not helping the already jittery market were reports of China possibly ramping up Covid restrictions due to some additional deaths and the lockdowns spreading.

As a result, the Chinese Yuan plunged, and the US Dollar continued its 4-day uptrend.

That means the much hoped for reopening may not pan out as planned, thereby putting the discussion of a global economic recovery back on the front burner. Still, the recent bear market bounce may find some support in the form of reduced trading this week, as traders take time off, which can increase volatility due to lower volume.  

If there are no market news, rumors can give an assist. This was the case today, when speculation surfaced that OPEC+ was considering production hikes causing Crude Oil to tank, shortly after which the denial was published, which then created this silly chart.

The most shorted stocks continued their unwind process from the post-CPI squeeze, as ZeroHedge put it, which again tells me the importance a short squeeze has when to comes to creating or sustaining bullish momentum.

Bond yields went predominantly sideways, gold faded, and the Fed’s Terminal Expectation rate moved back to its cycle highs above the 5.08% mark. Again, the much hoped for pause or pivot (to lower rates) is nowhere to be seen.  

1. Moving the markets

Weakness prevailed right from the get-go, when retail stocks were dragged lower due to Target reporting a decline in sales causing their stock price to dive some 13%. Shoppers are struggling with high inflation ahead of the biggest shopping season of the year.

On the other hand, US Retail Sales soared 1.3% MoM in October, which seems to indicate that consumers are willing to spend, yet Target’s report points towards slower consumption. Go figure…

Other economic data painted an ugly picture with US Homebuilder Confidence collapsing in October and Homebuyer Confidence simply biting the dust, as ZeroHedge explained. To add more pain to a shrinking economy, we learned that US Industrial Production unexpectedly contracted last month, while Capacity Utilization slowed.

None of the above will potentially support bullish market sentiment, once this quarter ends, but for the time being more upside momentum is a possibility during this seasonally strong period of the year.

Today, it was the Fed’s Mary Daly singing these hawkish tunes:

• Somewhere between 4.75 and 5.25 seems a reasonable place to think about as we go into the next meeting. And so that does put it in the line of sight that we would get to a point where we would raise and hold.
• Pausing is off the table right now, it’s not even part of the discussion. Right now, the discussion is, rightly, in slowing the pace.

Daly also warned the ‘peak inflationistas’:

• One month of data does not a victory make.

With the exception of the 2-year, bond yields fell and pulled the 10-year down by 8bps to end the day at 3.695%. The US Dollar was flat and so was gold, which is strongly correlated to it, i.e., if the dollar drops, gold rallies and vice versa.

To review where we are in historical context, here is the latest update of the 2008/2009 analog.  

1. Moving the markets

Today’s Producer Price Index (PPI) came in better than expected with CNBC highlighting the data as follows:

• The producer price index rose 0.2% in October, below the 0.4% estimate.
• A significant contributor to the slowdown in wholesale inflation was a 0.1% decline in services, the first outright decline in that measure since November 2020.
• On a year-over-year basis, PPI rose 8% compared to an 8.4% increase in September.

Still, an “only” 8% YoY increase is hardly anything to get excited about, but algos and traders are living in their own world, in which it’s a foregone conclusion that we have seen peak interest rates and peak inflation, both of which are now believed to be on a downward trajectory.

As a result, the data were seen as a positive with the markets scoring a green close despite a sharp mid-day sell off, which pulled the major indexes off their morning highs with the rollercoaster ride continuing.

Bond yields meandered throughout the session with the 10-year losing 9bps to close at 3.77%, well below its much-fought over 4% level. The US Dollar continued its slide thereby supporting gold, which advanced again and is now within striking distance of regaining its $1,800 level.

Our main directional indicator, the Domestic Trend Tracking Index (TTI) has now remained above its long-term trend line for the 4^th straight day. However, there has not been much follow through to the upside, so the TTI is only a modest sell-off away from breaking back below its dividing line between bullish and bearish territory.

I like to see more staying power and upside momentum before issuing a new “Buy” signal for that arena.