SMU (2023-02-05): NFP Surprise – Good or Bad?
Past Week’s News:
- US: FOMC Rate Decision – Hikes rate with 25 points (dovish signals)
- US: Non-farm Payroll 517k (vs 196.5k expected, 235k previous)
- US: Unemployment 3.4 (vs 3.6 expected, 3.5 previous)
- US: ISM Composite 47.4 (vs 48.1 expected, 46.6 previous)
- ECB: Hikes rate with 50 points (further hikes in March)
- Euro Area: (prel) GDP 1.9 (2.3 previous)
- Euro Area: (prel) Core Inflation (HIKP) 8.5 (5.2 previous)
- Euro Area: Unemployment 6.6 (6.5 previous)
- Euro Area: Consumer Confidence -20.9 (-20.9 previous)
- China: PMI Service 52.9 (previous 48.00); Manufacturing 49.20 (previous 49.00); Composite 51.10 (previous 48.30)
Market Sentiment:
The markets continue to increase, the battle between the bulls and bears continues, and the Fear vs Greed is getting more stretched every day. The question is how long will this continue?
At the moment, more and more retail traders are increasing their shorts… this usually gives room for extra spikes on the upside, due to bigger players increasing the price to knock out their positions. Might seem contra-intuitive, but there are always forces driving the markets that we are unaware of. For example, I heard in a Swedish podcast (Antiloop), that this type of rally is typical for presidential cycles. If true, then the markets might continue to rally until the middle/late spring. I will do further analysis on this part and compare the data and patterns from previous presidential cycles.
Furthermore, the USD continues to weaken across most of its trading pairs, which we have discussed before due to the negative correlation towards strong markets. However, USD did spike this Friday due to the NFP result, so next week will tell if it was a short-term reaction or the start of a trend shift.
We can also see that the long gold positions have increased quite a lot since last week (from 59% to 68%).
A few words about the economic news and the major point was first FOMC’s rate decision, where the FED hiked the rates with 25 points, but were also giving away dovish signals. However, this might change after the Non-farm payroll came in very strong and well above expectations (517K vs 196.5K expected). In a normal situation, this would have been a positive signal, but in this market, it means that the FED can increase the rates, even more, to cool off the economy and inflation.
- This Week’s Fear vs Greed 93%
- Last Week’s Fear vs Greed 88%
- SP500 Net Long 37%
- Last Week’s SP500 Net Long 42,5%
- EUR/USD Net Long 49%
- Last Week’s EUR/USD Net Long 41%
- Gold Net Long 68%
- Last Week’s Gold Net Long 59%
Indices: 200LB & YTD
Market Update: Indices
Comment: Indices
All indices are continuing to increase, and I expect some drawbacks soon. However, I am unsure that this drawback will be the one that sets new lows (as explained in the previous section). I think it is easy to underestimate this bear market rally (which I still believe it is), and that it might continue further than expected. So trade with caution and keep track of the economic environment. I believe there is a limited upside, so work with stop losses and be prepared to change course.
To be clear, I think the market will set new lows this year, but I have not convinced the bear market rally is out of fuel. It might have a short drawdown in near future (the coming 1-2 weeks), but then continue to increase. I will keep a close eye on this and update my views.
US Sectors & Industries
I will not talk too much about sectors. Here, just like with the markets, we see revenge of the sectors that did poorly last year, and the opposite for the ones that did well. This is going to continue in line with the markets until the fuel of the bear market rally runs out and it pivots towards new bottoms. Then the strong sectors YTD will start to fall and the ones that did well during the last major decline are going to do well.
My view is still that exposure to the following sectors this year is a good strategy. And the sectors are:
(1) Consumer staple, which is defensive and stable. Looks like it is going to continue its upward trend with no major surprises.
(2) Finance sectors such as banks, which since the financial crisis have prepared for future recessions and are well off to weather out the storm.
(3) Energy, which is the main ingredient for the global expansion and adjustment from dependent on Russia. Also, it is a necessity for industries, so even though inflation and shortage in supply might increase the commodity prices, the industries that are dependent on energy, e.g., oil, has to pay the price no matter what.
Market Update: Rates
Comment: Rates
We had two rate decisions, first was FOMC which hiked the rate with 25 points but was giving out dovish signals. We also had ECB that increase the rate by 50 points and said that more rate hikes were to come. However, given the rates above, they are still consolidating. If you are into technical analysis, it is easy to see that there is a bullish triangle taking form and that gives a higher probability for a breakout on the upside. However, if we look at the 10-year graph, all rates are close to their tops. So the question is, how much more rate can the U.S. and the world economy take?
I think we might see some more rate hikes due to the strong NFP number, but later this year when the rate effects hit society and the central banks have to pivot, then this might be a catalyst for the markets to decline and aim for new lows.
Market Update: FX
Comment: FX
Not too much to say about FX this week, we can see that the USD has gained strength towards most of its trading pairs. This is probably due to the strong NFP numbers and the market expecting higher rates / a more hawkish FED, which is good for the USD. But for now, it is too early to say. However, this is interesting to keep an eye on next week to see if this was simply a drawdown and if the USD will continue to weaken, or if this is a change in trend (my bet is on the first alternative, at least until the indices start to aim for new lows).
Market Update: Commodities
Comment: Commodities
Looking at the 200LB we can see that most of the metals that started 2023 strong, have experienced some drawdown and declined. Here we also see that cotton and wheat have formed what looks like a bottom and might start to build strength toward spring (which is in line with my wheat and spring hypotheses from last week).
To gain more insight, I think it is better to zoom out to the 10-year graph. Here we see that gold and metals are in what looks like a consolidating period, and I think it is gaining momentum to reach new highs. Here we also see that wheat and cotton are now back at the base where the 2022 speculation spike began. This also strengthens that there might be a bottom we see in the 200LB period and that we should expect higher prices this spring. Finally, in the 10-year graph, we see that there is still a downside for Natural gas before the past lows are hit. I expect the price here to continue to go down until at least being in an outlier country in the box plot (which symbolizes the 5th percentile. Then, I think natural gas might pivot. However, this is very dependent on the climate and energy politics, therefore, this might change depending on how the winter/early spring develops.
Summary:
- Markets have stayed strong, but might experience a drawdown in the coming 1-2 weeks. However, I do not believe this is the end of the bear market rally, and that this rally might continue longer than expected.
- Rates have continued to consolidate, and the market is anticipating FED’s reaction to the NFP surprise.
- USD has strengthened at the end of last week, but this might be temporary and should be watched next week to see if it is a trend shift or not.
- Gold and metals are consolidating, and I believe, they are charging to new highs. Wheat and cotton might have started to build a bottom, and depending on weather and energy policies, natural gas should continue its decline.
Next Week:
- Friday: US: Consumer Confidence; UK: GDP (prel); China CPI & PPI