US market indexes fell last week despite a rather positive week in Europe because the Federal Reserve has indicated that monetary tightening would continue this year in response to the “strong” U.S. job market and the need to keep inflation close to the 2% target.
Reading the fine lines of Friday’s Jobs Reports showed a decrease of 288K full-time jobs but decreased unemployment to 3.4%, the lowest since 1969. The job increases were all part-time.
Investors should be very worried about the Fed increasing rates due to high unemployment because the numbers are actually saying something different.
I think the Fed would like to see CPI below 4% and unemployment at 5% or greater. However, I think the Fed is coming in hot because:
- Unemployment Data Error: They either ignore or don’t see the real numbers regarding unemployment. Having 2 or 3 full-time jobs is not the same as one good full-time job.
- Strong Dollar: Every adjustment to rates has an exponential effect due to the strong dollar. The Dollar has recently gone down, but it is very high. It is like driving at 150MPH vs. 70MPH.
- Delayed and Flawed CPI: The CPI report is a survey that doesn’t show actual prices, let alone real-time prices. Over the years, the report has been changing and doesn’t include everything.
- Political Correctness: The Fed and the current administration are focused on optics rather than doing their job. An example of this circus is their lying about rising inflation. They knew it, but for political reasons, told everyone it wasn’t happening until it was out of control.
I think we are heading into a recession. Expect the Fed and DC to ignore it and then act like they were taken off guard. Maybe they will blame global warming?
Sadly there is not much anyone can do to stop this clown show. However, there are going to be some great investment opportunities soon. Start looking at companies like Coca-Cola that will likely take a hit on the market decline but will most likely do well in the long term. Personally, I dumped my REITs last year because I saw a real estate crash. There may be some good deals in a few months.
This week, we will release our first recession stocks, portfolios and strategy for paid subscribers.
Junk Bond Crash
Next year, businesses with low credit ratings may have difficulty refinancing maturing bonds due to increased borrowing prices and a weaker economy, which might lead to a wave of bankruptcies. Having been a broker in 2003, it was sickening to see people lose their life savings with bad bonds. I highly recommend readers review all income holdings’ balance sheets.
Housing Market Hits All-Time Lows
According to a publication made last Wednesday, the National Association of Realtors said that their index of contract signings to acquire previously owned houses dropped 4% this month to 73.9, the lowest outside of the pandemic in data going back to 2001. A Bloomberg poll of economists found that this decline was more severe than they had anticipated.
In 2022, the Federal Reserve’s vigorous tightening campaign to temper inflation significantly affected the housing market. Home sales and prices have been falling for months due to rising borrowing costs, which are now about double what they were at the beginning of the year.
In my area, the prices have only started to decline this month. According to Zillow, my house is down roughly 7% from last year’s high. Other areas I have looked such as California, are down over 15%.
Calendar & Events
The Consumer Price Index for December is due out on January 12, so inflation will be front and center next week. Market participants will be paying close attention to see if the latest CPI data changes expectations that the Federal Reserve would raise interest rates by 50 basis points in February and another 25 basis points in March before holding rates steady at a terminal rate of 5.0–5.25%.
After jumping to +7.1% in November, economists anticipate a slowing of December’s headline CPI reading to +6.7%, with a 0.1% increase month-over-month. The increase in core CPI is expected to be 5.6%, representing a monthly increase of 0.2%.
On Tuesday, Federal Reserve Chair Jerome Powell will be speaking. Inflation data for the United States will be released on Thursday, so this event and that data will be major market movers.
On Friday, another popular investing day, the University of Michigan will release its preliminary U.S. consumer confidence index. On Monday night, the globe will learn about the latest consumer and producer prices in China.
Everything has been fine up to this point. Despite the fact that the U.S. labor market is showing signs of resilience that aren’t helping the Fed, interest rates halted on Friday, giving the stock market indices a boost.
There has been a consistent link between interest rates and stock market indices for several months now, and this trend has shown no signs of changing. The 50-day moving average for the 10-year yield is still above the current level and is providing resistance at roughly 3.80/90%.
OIL & ENERGY
Oil markets are suffering from a hangover this week, with prices dropping by approximately 7% for both Brent and WTI to start the year. Reuters sparked the conflict by reporting that OPEC’s production likely rose in December despite the organization’s stated goals for reducing output. Oil production by the cartel allegedly reached 29 million barrels per day in December, up 120,000 barrels per day from the previous month of November.
The revival of manufacturing in Nigeria is a major contributor to this growth. Despite China’s reopening, operators are concerned that the country’s accelerated Covid-19 may have a negative impact on demand. Pricing-wise, a North Sea Brent currently fetches roughly $83.50, while a US WTI fetches $78.40. Natural gas prices are still being held back by Europe’s unusually mild winter.
GOLD & PRECIOUS METALS
As reported by the Shanghai Metal Exchange, the rising number of Covid-19 cases in China negatively impacts the country’s demand for industrial metals. Due to scarce available labor, smelters and steel mills have reduced production. There is a price of roughly $8,400 per ton of copper on the London Metal Exchange. Gold may be breaking $1900. Bond yields have dropped, helping Gold.