Priced in for dovish Fed
Kitco Commentaries | Opinions, Ideas and Markets Talk
Featuring views and opinions written by market professionals, not staff journalists.
S&P 500 correction didn't reach far, and bonds were back with more strength early in the session. Also the sectoral rotation leaned to the risk taking side as cyclicals with value were much stronger than defensives, and tech didn't get the lion's share of attention. Note how well financials and discretionaries were doing – my recent picks when talking the overly pessimistic view of consumer spending. The only fly in the ointment is late day weakness in bonds, and corresponding stock market decline into the close, which leaves stocks extended unless bonds catch up a bit today.
And that's not totally likely as tomorrow's rate hike virtual certainty triggers some prepositioning in bond yields (rising), USD (rising) and precious metals (still mostly down, and catching a bid only when Treasuries catch an intraday bid).
Keeping in mind Sunday discussed big picture:
(…) It's all about Fed tightening bets meeting soft landing estimates. Well, what estimates I say when LEIs are still in decline mode for 15 straight months, yield curve is inverted etc? Messing up with traditional timing models for late Q3 recession is the already a few times mentioned excess savings and highly expansive fiscal policy and various remnants of corona era policies, these all worked and work to prolong its arrival as also covered in the latest video. Yet at least a modest recession is unavoidable in my view – only its timing, severity and when the stock market gets that, are open questions.
And stocks don't seem likely to move into a powerful, 10%+ downswing any time soon – consolidation and volatility triggered chiefly by rotations out of tech, and somewhat communications and only select discretionaries (remember my words about the relative strength of the consumer, which doesn't make for a bearish XLY case) into my best 2H 2023 sectoral picks of energy, industrials, materials and financials with further improvements in defensives incl. healthcare.
Friday, this effect wasn't powerful enough to return S&P 500 to the opening values as tech gyrated too much. Big picture, that's what we can expect in stocks over the coming weeks, making for a traders' market as select sectors are more richly valued than others. Market breadth is though broadening beyond the Top 7 stocks, and that means a sizable downswing is unlikely when the guessing game of market's focus is whether Jul is the last hike or not. This rally can run still more into the extreme greed territory.
And accounting for return of inflation – what else to expect given rising oil prices and used car prices being as much the key disinflationary drivers as base effect?
(…) still robust job market together with strengthening oil prices later this year would work to bring up inflation to the 4.4 – 5% range in Dec 2023 – hardly a constellation that would allow the Fed to take its foot off the pedal (besides July, we have 1-2 rate hikes coming by Jan 2024 FOMC)
Yesterday's PMIs don't change the picture much – manufacturing improved but is still in recessionary territory, and services came in weaker but still expansionary. Consumer confidence isn't likely to take a hit today, and Richmond manufacturing isn't to provide us with a stunning reversal stopping LEIs from declining. Thus, risk assets can look to Friday's decelerating core PCE data for an upswing (dovish Fed is what markets are largely acting as having gotten already) – this and housing data before Friday, I talked amply in yesterday's video.
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Let's move right into the charts (all courtesy of www.stockcharts.com) – today's full scale article contains 4 of them.
Gold, Silver and Miners
Relatively shallow correction in gold and silver is approaching its low point, miners are neutral already. Sunday's words still apply – gold held $1,960, and more backing and filling around this level is likely. Also, some selling pressure is still to play out before FOMC whatever it is preceded by.
Crude oil again outdid expectations, but is now at tougher resistances spaced by approximately $2 apart - $78, $80 and $82.50. Oil stocks keep having an easier time rising now.
Copper fulfilled expectations, and had consolidated for a day at least a bit above $3.82 before rising above $3.86 – and this rise is happening before FOMC already as China stimulus news help.
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