SMU (2023-01-22): Taking 2023’s Temperature
Start of 2023: Taking the Temperature
- US: Non-farm Payrolls 223K (vs expected 200k, previous 256k)
- US: Unemployment 3.5% (vs 3.7% expected, previous 3.6%)
- US: PMI Service 44.70 (previous 46.20); Manufacturing 46.20 (previous 47.70); Composite 45.00 (previous 46.40)
- US: CPI (Inflation Rate: 6.50% (previous 7.10%); Core Inflation Rate: 5.70% (previous 6.00%)
- US: Consumer Confidence 64.6 (vs expected 60.5, previous 59.7)
- US: Retail Sales -1.1% (vs expected -0.8%, previous -0.6%)
- US: Debt ceiling reached
- Euro Area: CPI (Inflation Rate: 9.20% (previous 10.10%); Core Inflation Rate: 5.20% (previous 5.00%)
- UK: CPI 10.5% (vs expected 10.5%, previous 10.7%)
- UK: Consumer Confidence -45.0 (vs expected -40.0, previous -42.0)
- China: Full Year (2022) GDP Growth 3% (previous 8.1)
- China: Retail Sales -1.8% (vs -8.6% expected, previous -5.9%)
Market Sentiment:
The start of 2023 has without a doubt been intense. Indices and gold have rallied, rates have gone down, and the economic indicators are signaling that a recession is guaranteed.
If we look at Fear vs Greed we can see that it has come down slightly, and this is at the same time that the markets started to dip at the end of last week. The net long position of SP500 is about 50/50, the EUR/USD is about 36% long EUR. and the Net long Gold is at 57% (which is lower than the 70% we saw at the end of 2022).
The average increase across indices YTD is about 5.62%, however, even though this looks like a “great start” of the year, do not forget that the year reset is kind of arbitrary… If we look at indices development given a lookback period of 200, we see that the average is -2.25%, which is not too bad given the past year… this recovery is mostly due to the October rally that has been going on for some time.
We see that volume is around average and VIX has been way below 20 (minimum 18.35) and is now slowly moving upwards.
But what is the sentiment from the central banks?
At the moment, as we can see in the news summary, almost all economic indicators are showing that we either are in or are about to enter, a recession. The only joy the markets rally on is what started as decreasing inflation (which is still high) and now has turned into FOMO and short squeezes. The central banks are giving hawkish signals and are staying firm with no pivot in the near future, however, this depends on the economic outlook. If the world economy is about to crash, they are going to have to intervene… One thing to keep in mind is that in the past, the main indices have bottomed about 10 months after the central banks’ first pivot.
For now, the markets are focusing on lower inflation and annual reports. Maybe the focus will shift toward the economy’s signals after this reporting season is over.
- This Week’s Fear vs Greed 76%
- Last Week’s Fear vs Greed 81%
- SP500 Net Long 50%
- Last Week’s SP500 Net Long 46%
- EUR/USD Net Long 36%
- Last Week’s EUR/USD Net Long 34%
- Gold Net Long 57%
- Last Week’s Gold Net Long 56%
Indices: 200LB & YTD
Market Update: Indices
Comment: Indices
The markets have continued to rally since October 2022, and many of them are trading near or above SMA200 and are officially in a bull market. However, the economic outlook is quite the opposite, so we are going to have to see how long this will continue. Looking at the 200 lookback period, we see that most prices are trading above the boxplot whiskers, which is the 95th percentile of the lookback range. Comparing this to the 10-year view, the last prices are somewhat mixed between the different indices… But except for HangSeng and Nasdaq, we see that they are trading above their mean and outside the box, indicating that there is plenty of downside in case of negative news.
Even though the downturn is yet to happen, it is still my view that this is a bear market rally, and that the markets will turn down and set new lows in 2023. However, markets can stay irrational for quite some time, therefore it is important to keep your eyes open for negative signals and prepare for these signals getting acted upon.
US Sectors & Industries
We can see that the increase in SP500 is more or less across all sectors despite defensive sectors such as consumer staples, health care, and utilities. The winner is airlines, and I assume this has to do with the expectation of the re-opening of China, and that there is going to be a wave of traveling Chinese tourists. After that, the winners are Clean Energy and semiconductors.
Market Update: Rates
Comment: Rates
Despite rates coming down now at the beginning of 2023, they look like they might turn upward. There are expectations of rate hikes from the central banks, but at a lower pace than previously (around 50 points). Another thing worth mentioning is that the US has now reached its debt ceiling/limit, which means that a rate increase will negatively affect the US economy and its ability to meet interest payments… For now, they can prolong the effects until June when congress and President Biden have to agree with actions and eventually raise the debt ceiling.
Market Update: FX
Comment: FX
After a strong first half of 2022, the USD has weakened compared to most currencies. I have mentioned it before, but it is important to keep in mind the negative correlation between the USD and indices. What I mean by that, is even though the “trend” can look easy to follow, it can quickly change depending on how the economic outlook affects the markets. If the market and indices turn sour, then the USD will likely increase once again.
Another thing to notice is the dramatic increase of Bitcoin and Ether vs the USD. I usually keep an eye on crypto as a risk indicator, and we can see that this recent increase is indicating higher risk tolerance in the markets. This will be interesting to follow given the two camps around crypto, where one part argues that it is the new gold, while others argue that it is a worthless speculative asset. Either way, this will be the first time that crypto is going to experience a high-interest rate climate, which will gain strength for one of the sides.
Market Update: Commodities
Comment: Commodities
Mixed results for commodities.
First of all, gold and metals have started the year strong, and continued to rally since October. Here, we can see signs of many parts of the economy. First, for gold, the Chinese central bank is buying tons, also, the case for gold as insurance against inflation is keeping the yellow rock strong. We can also see in other industrial metals like copper and aluminum, that this is increasing due to the electrification and a re-opening of China, where production and hopefully, global consumption will increase.
However, natural gas and oil, energy commodities, have gone down a lot in the past 6 months. I thought these would increase now during winter, given the European energy crisis. But fortunately, the winter in Europe has so far been mild, making the demand for energy to heat homes lower. Moreover, winter is not over yet, and the war in Ukraine is still going on. Therefore, without any speculation, we can just hope that this corrects course soon because no one is gaining from this.
Summary:
- Strong start for markets and commodities in 2023. Despite negative economic outlooks, the markets continue to take risks and push prices up. We will see how long this trend continues and if the market will turn and aim for new lows.
- USD is still getting weaker against other FX pairs, and Bitcoin and Ether have recently increased (vs USD).
- Gold and other metals have continued strong since October, and energy commodities have decreased together with a mild European winter.
Next Week:
- 23rd Jan. Euro Area: Consumer Confidence
- 24th Jan. US, Euro Area, UK: PMI
- 26th Jan. US: CPI (prel) and Homebuilders
- 27th Jan. US: PCE-deflator and Consumer Confidence