SVET Markets Weekly Update (December 5, 2022)

The second halve of the prior week (30 Nov to 2 Dec) market players were trading one news — Powell’s hinting on 50 points increase on the next FOMC meeting (Dec 13) — dismissing all other macroeconomic updates, including:

  • ADP Employment Change (for November): increased 239K while forecasts put it on 198K;

As a result, NASDAQ Composite Index, which was down on Mon and Tue trading sessions, jumped almost 500 points (~4.5 percent) during one hour in Wednesday. It kept probing 11450 resistance till Friday’s closing.

BTC mimicked NASDAQ with doubled vigor, going from the low of 15995 on Mon to Thursday’s high of 17342 (increased for 8.4 percent) and trading around 17th on Friday.

Wednesday, Nov 30 we have seen NASDAQ rebounding spectacularly on the Powell’s speech, going from 11K to 11450–4 percent rise — in a matter of minutes, something we haven’t seen for quite a while.

BTC followed but with much lesser enthusiasm — from 16800 to 17200 (2.3 percent). If it happens all the times I might say that it demonstrates that free, global, 24/7 markets absorb sudden price volatility better than the regulated ones. But we are not there, yet :)

What agitated markets was this Powell’s line: “ … it makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down. The time for moderating the pace of rate increases may come as soon as the December meeting.”

The main line of Powell’s delivery, named “Inflation and Labor Market”, with its focus on the core CPI seems to be a self-apologizing one. What Powell meant is that because the major cause of inflation — food and energy prices — is out of his control, he intends to do the maximum harm to the least relevant but the most vulnerable contributors — private investors and consumers.

For that Powell spent 80 percent of his time trying to prove the point that home owners / builders hiking rents / materials prices and retires, who became too wealthy in 2021 to seek a second job, are, simultaneously, running inflation out of hand and tightening the labor market.

Powell implies that us — greedy people — not the initiators of crazy government’s monetary policies and indiscriminate lock-downs — have to be hold accountable for the markets’ rupture. Accordingly, Powell dreams about ‘a moderation of labor demand growth’ and promises more devastations until the inflation retracts back to 2%.

Friday, December 02 markets remained unperturbed (with NASDAQ gaining ~60 points and BTC adding about the same) despite BLS Payroll report showing an unexpected increase (by 263,000) of employed peoples in the non-farm sector. Gains were registered in leisure, hospitality and government. Employment declined in retail trade, transportation and warehousing. Overall jobs situation is, meanwhile, unchanged with unemployment rate staying at 3.7 percent.

Ineffectiveness of FED policies reveals itself in numbers. For example, 32 thousand merchandise stores jobs were gone in a month. That is where most vulnerable groups of population usually seek their livelihood. On the other hand, in financial and information sectors, which Powell holds culpable for the inflation rampage, added 14K and 19K jobs respectively.

Looks like after Powell’s inspirational speech two days ago traders intend to shrug off all minor negative news for a while :)

The looming FOMC meeting (13 of December) is on everyones mind. All macroeconomic updates of the approaching week are viewed from that point. Most notably — the following:

  • ISM Non-Manufacturing PMI for November scheduled for Monday, December 05;

Although, in one-and-a-halve week, none of those indicators is likely to weight into the FOMC members’ decision, still, many watchful traders will be holding their fingers close to buy / sell buttons at the time of announcements (early NY morning trading hours).

With so many jittery players in a game I won’t be surprised if something not-so-significant sparkles the next market run or sell-off.

Job Claims is the most potent candidate for a position of the market agitator. However, the fact that (as I mentioned in previous updates) job market is tightening more-than-marginally (including, because of tech companies layoffs) has already been captivated by prices. So, not much disturbance in the force is expected on Thursday when DOL (Department of Labor) issues this indicator.

To see how insane the present economic policies (of absence of such) it suffices to look at the Institute of Supply Management (ISM) Purchasing Managers Index (ISM) for the past couple of years.

For example Services PMI (more than 400 purchasing executives — a very sober bench of peoples, if you ask me :) — from services firms are questioned monthly to get this index) went from ~42 percent in March 2020 to ~70 in October 2021. It has never happened during the past two decades of this index history. Non-Manufacturing PMI came down again to 54.4 in November (below 50 indicates economic contraction) after Powell started to implement his policies.

Index has four parts in it: Employment (which stands at 49.1); Business Activity (55.7); Supplier Deliveries (56.2) and New Orders (56.5). As we see, businesses owners, faced by the unprecedented rise of capital costs, started to undercut their expansion programs first. As a result, regular employees take all the heat.

Also, according to ISM, among the most affected industries are (in order): Real Estate, Rental, Social Services, Public Administration and Wholesale. The least affected: Mining, Entertainment, Transportation; Utilities. Again, under the FED fire are the most vulnerable groups of population.

That definitively doesn’t look good for Powell’s political career prospects. So, no wonder that he finally started to soften his hawkish tone during his latest, November 30th speech.

The graph of US Trade Balance reminds me an ocean floor map. From the flat plane extended to the end of 1970th (the post-war, closed-end US economy, with some temporary trade deficits islets, f.e. during the oil embargo, but not more than ~15 billion) it slides down (the deficit — up) gently to mid-1980th (Reaganomics opened up foreign markets for US capitals), then there is an upturn (on more stringent monetary policy) till the end of 1980th.

From there (and the next 20 years of the post-cold-war economic expansion) the trade deficit only went up (and the curve — down) until it hit ~ 70 Bln, reaching the first underwater plate in the midst of mortgage-debt crisis of 2007–08, when FED hiked the rate and foreign capitals run for safety. It resulted in deficit’s curve almost vertical spike (contraction to ~30 bln).

The next decade the deficit went up and down, staying within the range of -30 to -50Bln, until Boomers took that genius decision to shut all economic activities down, panicking — not thinking. As a result we have got this Marianna Ravine on the graph, when the curve reached under 100 bln as costs for energy and food started to get out of all hinges. Immediately after that as we saw Boomers panicking again and coming out with the second genius idea — to moon the rate and to fry the golden goose of the US economy in a way.

On a surface, the beneficiaries of such short-sighted policy, which led to trade deficit going from below -100B in March to -73.3B in September (prognosis for Oct is 73B), are supposed to be domestic producers (now, primarily, energy suppliers), which can export less for more. In fact, however, the so-called ‘strong dollar’ disproportionately hurts oversees suppliers as they got less USDs and, in addition, their national currencies inflates with a faster pace. Then this boomerang returns hitting US local consumers, which now face a sharp reduction of sheep imports as less foreign exporters are now on the market.

The Producer Price Index gives us another confirmation how ineffective Powell’s draconian, anti-business policy is. PPI has been steadily rising right from the start of the lock-downs in April 2020 when this index lingered below 115. It reached 140 within the next two years (for comparison, previously it took PPI a decade — 2010 to 2020 — to grow from 100 to 115).

In fact, neither the war nor FED’s counteractions accelerated (or slowed down) the PPI’s growth rate. It has been steadily rising, regardless, propelled by massive disruptions of supply chains all over the world caused by national governments’ knee-jerking enclosure policies.

We saw first signs of producers prices growth’s tempo easing down only in July 2022. However, it was the early signs of the starting recession — not late indications of the ending inflation. October’s PPI grew again for 0.2 percent. The same increase is expected by market forecasters in November.

Overall, all those updates means a little. If we take the ever present war-factor away, this week’s trading scenario for institutional market players is to sit tight waiting for the next week’s FED meeting. Then some optimists expect Santa Claus rally (or some feeble attempt on it) to begin.

Note, that everything what you have just read might not be considered as am investment advise — it is just my opinion which can be totally out of mark.

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Angel Investor (20+ years), Serial Entrepreneur (14+ companies), Author (> 1M views), Founder of Evernomics, 40+ Countries

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Angel Investor (20+ years), Serial Entrepreneur (14+ companies), Author (> 1M views), Founder of Evernomics, 40+ Countries