"On Wednesday
afternoon, the Federal Reserve didn't just raise interest rates for the ninth straight time in the face of a banking crisis. It also
affirmed that its plans for the year remain more or less intact, and that
nearly all of its leaders expect at least one more rate increase to come."
- When the above hawkish statement mentioned by
FED, did investors really buy in? No, not even a little bit.
- Financial markets are skeptical that banking
troubles will tighten credit conditions to cool down the growth over the
coming months.
- Data is the most convincing evidence to support
the forecast. Let's look!
United
States Inflation Rate
Although annual inflation rate in the US slowed to 6% in Feb,
2023, the inflation is still remains three times above Fed's target of 2%.
United States Unemployment
Rate
The unemployment rate in the United States edged down to 3.5 percent in March 2023, against expectations that it would hold at 3.6 percent. The trend above had shown US unemployment rate is flattening and average hourly earnings is at declining stage. This indicates that the required vacant position in the market had mostly been filled. On the other hand, average wages are in declining trend, where companies are not going or not afford to increase higher wages to attract potential workers.
On the other hand, it is interesting to observe that the labour shortage is declining and job cuts are increasing and both lines cross over in mentions on S&P 500 Company Earnings Calls.
In short, company is struggling and needs to cut cost, which had resulted in jobs cuts, lower average wages, and filled the majority of limited positions, led by a notably sharp weakening in business conditions.
United States House Buy
Index YoY
The average prices of single-family houses with mortgages guaranteed in the United States advances 5.3 percent in January, the least since May 2020.
The chart above obviously shown the housing industry is slowing down.
United States PMI
It is as expected that purchasing department slowed down the purchase activities when retail sales in the US were down month over month.
It was the first decline in consumer sentiment in four months, as consumers increasingly expect a recession ahead and was exhibiting consumer confidence as downward momentum as below chart.
United States Retail Sales vs Consumer Confidence
High Interest Rate are caught up with banks
With the high interest rate, First Republic, SVB, Credit Suisse case had raised the concern from investors, whether the economic expansion is near to it's end.
The banks collapsing in more recent days have been holding
U.S. treasuries as collateral. These have declined in value as interest rate
have spiked.
U.S. banking regulators have shown that they're serious about preventing any future fallout.
Therefore, FED is in difficult situation now, where inflation target 2% still not achieve but high interest rate caused risk for more banks collapsing.
Credit default data of its spike-up indicator shows that if FED remains high interest on monetary longer, not only the banks' sector facing issues, but the energy sector also going to face an issue if the oil price market remains at the $70 range, which is the middle low range in a price market, which lead companies run at losses. Soon, this will lead to a selloff in the market.
With the above analysis, the possibility of a US interest rate hike is lessened and may even remain flat, in my opinion. All the above data indicates that this is the trend towards the end of tightening in coming months.
Next, you might ask, what will happen to the capital flow?
Europe Inflation Rate
Look at the core inflation rate of Eurozone hits record high.
The core inflation rate in the Euro Area, which excludes volatile items such as energy and food, rose to a fresh record high of 5.7 percent in March.
The trend direction of euro inflation does not show signs of slowing down yet after we discover more data that supports the statement.
Euro Area Average Monthly Wage Per Worke
Euro Area average monthly wages are still on an upwards trend and people fill in the vacant positions, which bring down the unemployment rate.
People is still spending in retail with better consumer confidence that recession is not there yet.
With such record high Eurozone core inflation, there is still a long journey for European Central Bank to raise its key rate again in May to cool prices rises.
China Economy
China had its internal recession earlier than any country after Covid 19, and it is now showing early signs of recovery.
China's PMIs beat market expectations across the board, propelled by the reopening after dropping COVID restrictions and the resumption of activity after the lunar new year holiday," Duncan Wrigley at Pantheon Macroeconomics said.
We need to closely monitor China Caixin PMI and industrial production whether will slowly make an U-turn to increase the purchase and production. This is because in 2022, China was the 3rd largest partner for EU exports of goods.
Trading Theme: EURUSD
Capital will always flow to potential market either currency pair or safety assets.
In today's trading theme, we can see divergence of monetary policy @EUR up/ USD down.
We are expecting that in coming week, EURUSD will be ascending to move horizontally to accumulate further volume before swinging up to the next supply zone at 1.14.
Trading Theme: US500
Many of my friends have asked me, if it is good time to buy S&P500 index?
Looking at the chart, it is moving sideways and waiting for market direction.
There are 2 levels of supply zones to break through before going towards an uptrend. My speculation is that it will be a strong barrier for the US500 swing 2 levels up without a good economy support.
This is because most corporations are retrenchment, jobs cut, lowering average wages because company performance is poor.
My speculation would be first move up touch supply zone at 4,300 level and make a down trend direction towards 3,680 level.
Moreover, due to tight cash flow, junk-rated companies are borrowing again, and the average yields on corporate junk bonds have hiked.
Trading Theme: GOLD
Gold serve as safe-haven currency when market heading to high risk stage. Many readers comments that gold is already at it's peak level and will only move horizontal.
After studying the GOLD chart as below, there are possibilities that GOLD may break through level 2060; all depends on market volatility level and whether US will move into recession.
Trading Theme: CRUDE OIL
WTI Crude oil had been ranging horizontally for quite a while at level 80. One of the indicators is to monitor the China Caixin PMI; a higher PMI, will indirectly attract investors to buy crude oil to store.
If this scenario stays too long in this range, this will lead to oil companies run at losses. Therefore, if it breaks down below level 70, it may triggered more retrenchment and possibly more bankrupcies.
However, the possibility will lean more towards move up gradually to break 80 level, once China's PMI had starts to increase its purchase and production.
That's all for today sharing, stay tune for next update!