Santa Not Bringing Fed Pivot For Christmas (Wall Street Cheat Sheet)

S&P 500 12-19

The much-anticipated Christmas rally petered out toward the conclusion of the week and is now the 2nd week of market drops. Investors do not appear optimistic that the Federal Reserve can achieve a soft landing despite its relentless rate-hike campaign.

The inflation rate that was reported last week was lower than predicted, but the Fed said they would raise rates again by half a percentage point. The increase was expected and less than the four prior increases of 75 basis points, but it was still not the “Fed pivot” traders hoped for.

Both Federal Reserve Chairman Jerome Powell and European Central Bank President Christine Lagarde were careful this week to caution investors against mistaking their hopes for facts. A reduction in rates in 2023 is becoming a very optimistic prediction.

The stock market took a hit because investors had been hoping that the Federal Reserve would shift back to a more dovish stance on interest rates after seeing US macroeconomic data that was slightly weaker than expected.

Inflation is DROPPING FAST

I am NOT a huge fan of the Fed, but the rising interest rates have definitely dropped inflation for goods. Services are still holding in there.

My fear is that the Fed may be too aggressive, given the strong Dollar. If the dollar decreases in value, the rising rates have an exponential effect.

Recession 2023…

Concerns about a more significant economic slowdown have been heightened by a more hawkish view for 2023 and weakening retail sales. Disappointment persisted after the release of the S&P Global composite PMI for December. The most recent data has shown a steeper corporate activity decrease than in over two and a half years.

Peru Declares 30 Days of National Emergency – Copper Trade

Due to the continuous protests over the detention of ex-President Castillo, Peru’s Defense Minister Alberto Otarola declared a 30-day national state of emergency on Tuesday. A council of ministers made the decision to halt the rights to assembly, freedom of movement, and privacy. According to market reports, 10% of the world’s copper comes from Peru, and the country’s vulnerability to external influence is heightened by the instability that threatens copper exports.

Germany Has Major Energy Supply Problems

After losing Russian energy supplies, Germany spent over $500 billion on oil and gas to keep the country supplied with energy and the economy afloat. Germany is already struggling to keep up with power demands as winter sets in, forcing the government to turn to the more expensive spot (or cash) energy market. The higher prices are driving double-digit inflation passed on to consumers.

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Japan’s Manufactures are Pessimistic

According to a widely followed quarterly survey of Japan’s major manufacturers, morale has worsened for a fourth consecutive quarter, with rising material costs being the primary cause. Due to rising commodity prices and a weak yen, manufacturers are paying more to import the goods they need to produce their goods. Businesses dealing with chemicals and petroleum, and coal byproducts were impacted hard. When the shortage of semiconductors began to relieve, automakers’ moods improved marginally. Increasing prices have been a drag on businesses and families for the better half of a year.

Buyers with underwater mortgages in the United States have increased as home prices have fallen.

Less of a groundbreaking finding and more of a thunderclap of “duh” is the finding that 8% of 2022 mortgages are underwater, meaning that the loan balance is more than the home’s value.

It’s no secret that rising mortgage rates at the beginning of the year have weakened the housing market by prolonging the time homes sit on the market and dampening annual price growth. But what does this mean? Minimal. In most cases, this won’t be a problem unless the affected person plans to sell their property soon. However, only a tiny percentage of homebuyers this year are expected to fall into this category.

This was a throwback to the financial crisis when stories of people defaulting on mortgages significantly higher than the worth of their homes drew a lot of attention. However, Zillow found that during the housing crisis of 2006-2012, roughly a third of all US mortgages were underwater, and default rates never approached those levels.

Calendar & Events

  • Tuesday, December 20: Building Permits (November)
  • Wednesday, December 21: CB Consumer Confidence (December)

If last week was busy, the next one might be less so. On Monday, Germany will release its Ifo business confidence index, while on Tuesday, Japan’s Bank of Japan will announce its interest rate decision.

The week will round out in the United States with the release of the PCE inflation index on Friday and the Conference Board’s confidence index on Wednesday. On Thursday, we’ll get the third and final estimate of US GDP for the third quarter, but given that this is already so close to the previous two estimates, we shouldn’t expect much of a change.

BONDS

Despite a disappointing figure at the end of the week, in which the PPI (Producer Prices Index) for November rose by +0.3% compared to the previous month instead of the +0.2% forecast, expectations of a rate rise of 50 basis points remained nearly steady at around 75%.

But we’ll be keeping an eye on Tuesday’s announcement of the CPI (Consumer Price Index), which is predicted to show a modest slowing from October’s +7.7 percent year-over-year to +7.3 percent.

While investors would likely misread a score that came in higher than expected, a report that was in line with or lower than expectations would likely provide fuel to the recent boom in stock market indexes. Currently, the 10-year US government bonds yield is 3.53%, up from 3.49% on Friday.

COMMODITIES

OIL & ENERGY

Oil prices have risen this week even though a daily drop and are up by about 3 percent as of this writing. Despite disheartening economic data from China that could have further damaged operator morale, the market decided to welcome the latest report of the International Energy Agency (IEA), which raised its demand predictions for 2022 upwards and for next year (by respectively 140,000 and 100,000 barrels per day).

The IEA predicts that demand will remain robust in non-OECD nations even if the global economy enters a recession. The price of a barrel of North Sea Brent is close to $78, while a barrel of US WTI is around $73.5. The European reference price for natural gas is currently at 125 EUR/MWh, where it has been for some time.

GOLD & PRECIOUS METALS

The National Bureau of Statistics of the People’s Republic of China has released a trove of fascinating statistics that shed light on the development of China’s metals industry. Aluminum production climbed by about 10% year on year in November, while steel production remained depressed due to its close correlation to the robustness of the real estate market.

Market prices for industrial metals were all over the place at the weekend’s end. Aluminum ($2400) and copper ($8400) remained relatively constant, while lead ($2100) and nickel ($28575) declined. Gold, currently selling at around $1800, was walloped by rising bond yields.

CRYPTOCURRENCY

Bitcoin, the largest cryptocurrency, has retraced its entire comeback in the last 48 hours after briefly surpassing the $18,000 level in the middle of the week. As of this writing, it had rebounded to just under $17,000.

This latest setback is more evidence of how desperately the industry is working to win back the trust and optimism of investors. This uneasiness in the market can be attributed largely to the upheaval surrounding Binance in recent days following the collapse of FTX last month. The year of digital assets is shaping up to be a challenging one for crypto traders and investors.

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