Sive Morten
Special Consultant to the FPA
- Messages
- 18,630
Fundamentals
This week, guys, it makes sense to take a look at new inflation data trying to dig it and understand whether indeed it is so good and rates are pivoting. We should discuss elections intermediate results, but it has more relation to politics, thus, we will talk about it tomorrow in gold research. Last time we have taken detailed analysis
of new Fed statement. It was very important and had absolutely different style compares to usual Fed rhetoric. This time CPI numbers has triggered massive rally, which we suggest has more emotional nature rather than economical one. But let's go step by step.
So the dollar fell across the board for a second straight day on Friday, as investors favoured riskier currencies following signs U.S. inflation is cooling that boosted the case for the Federal Reserve to ease off its hefty interest rate hikes. Friday's dollar weakness was an extension of the move set off after Thursday's data showed U.S. consumer inflation rose 7.7% year-on-year in October, its slowest rate since January and below forecasts for 8%.
Still, some strategists warned that dollar bears remain vulnerable to a possible near-term rebound. The dollar found little support from survey data on Friday that showed U.S. consumer sentiment fell in November, pulled down by persistent worries about inflation and higher borrowing costs
Next week Wednesday's U.S. October retail sales should provide markets with a sense of how consumers are faring ahead of the key holiday shopping season. And remember the Federal Reserve is intent on hiking interest rates to contain hot inflation, even if that means a squeeze on consumption in the process.
September data showed a measure of underlying retail sales rising thanks to strong wage gains and savings, even as the broader number came in flat. Analysts polled by Reuters expect a 0.8% increase for October. The good-news-is-bad news crowd would likely see a strong number as evidence that the Fed has more work to do in cooling the economy. That outlook is unlikely to bring joy to markets battered by expectations of more monetary policy tightening this year.
So, about CPI... even White House officials confirm that it was possible to reduce inflation due SPR selling. And, actually nobody makes any secret from this fact. As we've shown many times in our Telegram channel, PSR now stands near lowest levels since 1984 and the time definitely will come when they have to be replenished. So Crude Oil prices could start climbing again back to 100$. So, This is definitely temporal effect, mostly populist for elections purposes.
Besides of SPR, there are other factors for inflation decreasing. First is the comparison base of the last year. It is very high. In October 2021, US inflation was 0.86%. It means that YoY comparison gives less difference, and change is smaller because of big jump in October 2021. Although major components (as you will see below) has not changed drastically.
Raw materials prices are dropping while logistics chains are recovering (the average cost of freight has fallen to the levels of 2019), the commercial ports functioning is gradually normalizing. And production inflation for intermediate products has turned down since July as well. We've talked about it last time.
Inflation expectations have been declining for four months now, according to surveys of the Fed's regional divisions among the five Federal Reserve banks (Dallas, Kansas City, New York, Philly and Richmond Fed). The aggregated index of inflation expectations correlates with inflation (lag 3 months).
The real US money supply is declining at a record pace. The cycle of staff layoffs begins – first of all, it affects the technology sector, then other sectors. Finally the pace of Fed tightening is a record for 42 years, this will inevitably affect investments and with a lag of 3-4 months for employment, the level of wages – all this will be directly reflected in the final demand in the economy.
If we take a look at the components, the core CPI (Ex. food and oil) shows 6.31%. We have slowdown in food to 0.4% MoM from 0.9% in last 4 months. At the same time public catering is growing at a record pace by 0.94%.
Traditionally, low inflation shows education (0.12% mom), telecommunications services ("-0.06%") and computers/components ("-0.2%" ) – in October there was zero price change. Prices for medicines and medical services are decreasing as well for "-0.5%".
Due to the slowdown in demand for real estate, the inflationary impulse in furniture, tools and building materials was "broken" - 0% mom, lower prices for gas and electricity led to a decrease in utility bills by 0.37%, but rent is still growing by 0.75% mom, and it contributes a 25% in the structure of inflation.
New cars are rising in price (+0.37%), and used cars are declining (-2.42%), fuel prices have increased by 4%. Prices in the culture, sports and entertainment industry are rising by 0.75% mom due to a shortage of labor.
That's being said together with short-term disinflationary factors that we've mentioned above we have long–term and more stable factors – a decrease in labor productivity, a significant imbalance in supply and demand (demand must fall by 8% to stabilize), a shortage of labor by at least 7-8 million people, a decrease in the quality of labor - all this accelerates wages. Inflation is becoming more stable as expenses spread across the entire range of goods and services. Initial claims, by the way has raised again this week:
The victory over inflation is still far away, but there is a temporary slowdown. Could recent rally become a starting point of major changes in market direction? This suggestion is doubtful. Usually, the major factors for this are - changes in fiscal and monetary policy and changes in the phase of the investment cycle. We do not have anything of this yet.
The tightening of the Fed policy still in the phase of acceleration and there are no prepositions for easing in the coming year. On Thursday, the Fed "screamers" (Logan, Meister and George) have come with the general narrative that it would be advisable to slow down the pace of rate hikes in the near future, as it seems that the Fed has accelerated too much.
As a result, expectations for a 4.75% rate on December 14th collapsed from 43% to 19% (now they are around 4.5% already), While on February 1st, 2023, the most expected solution now is 4.75% with a probability of 49% (jumped up from 25% before CPI report).
So currently market bets on 0.5% change in December 14 and 0.25% on February 1. We've mentioned this scenario previously. It seems that that 4.75% will be the terminal rate where the crisis will stand in full growth. We could not see the 5% level at all. But what the problem if Fed is coming to pivot?What is the inadequacy of the market?
In fact, market participants have formed an impulse with expectations that the victory over inflation has already happened, which is totally an absurd. There is still a very long way to go, and failures and bankruptcies will inevitably begin on this path, because the measure of the survivability of the system is very low and a very limited number of economic agents will withstand such a stress test. In the 70s, a local slowdown in inflation was a typical phenomenon, after which new inflationary highs were rewritten.
Economists suggest that there is no stable upward momentum and it just cannot be. Because to get this momentum, there must be a return to the past reality of monetary madness with uncontrolled printing. While the investment cycle, and consumer activity, must be restarted. That's not going to happen now.
The crisis is just beginning. A local slowdown in inflation is followed by a debt crisis, a contraction in investment activity and a collapse in consumer demand. So what the background for growth do we have? Credit card interest rates in the United States are rising to the highest in 30 years. Credit card debt has also reached an all-time high... $930 billion.
Elon Musk told Twitter employees that he can't predict for how long the company's funds would be enough for full-fledged work, and that the issue of the company's bankruptcy might come up later. Don't forget all the Digital Giants have started mass layoffs. Everything is OK and with high degree of certainty we could say that new lows are ahead.
Recent FTX scandal is coming out of just financial borders. Now it gets features of corruption and could lead to bad consequences for the whole crypto market and even to Dems. More signs appearing that Dems could have illegal financing of operations via FTX Group using crypto currencies and G. Gensler (SEC CEO) is involved in this crime. Probes are just have started but this stuff already smells bad. As you understand, many companies that could be hurt in this act and trigger chain reaction in financial sector. So, the echo could spread wide.
And we do not mentioned yet the rate disbalances. Actually we've provided earlier information on US debt expenses and Fed operational loss that will keep rising. Fed has to pay big rates on banks' reserves but gets financing on old debt that has low rates. If we get 4.75% rate then Fed should get 50 Bln of operational loss per week!
Second problem is - banks do not provide loans to real economy sector, because of big risks and prefer to get good return on risk-free Fed deposits. Why to give loans to industry companies for a few years if you could get the same 4%-4.5% return daily? Thats the reason to believe that as soon as February-March 2023, the crisis processes will rise to full growth, where talks will begin about the inevitable easing of monetary policy and maybe start of the next QE. Inflation should remain high, so this will be an interesting moment...
Speaking about the Europe - we do not have better situation there. Fed definitely has more tools and levers to drive the situation. New Germany inflation data just shows that bad things are happening. The graph shows a significant deviation of industrial orders over industrial production, which has become a record in history. Demand ended, and in September 2022 we see a severe collapse of orders, which indicates future problems with production. De-industrialization of Europe will begin in early 2023 on a wave of a worldwide demand drop and rising costs.
Inflation in EU and in Germany, in particular, is still accelerating. This week CPI hits 10.6% - highest level of total 70+ years observation history.
So, the bottom line is - crisis shows "normal" progression and we stand somewhere in the beginning of the process, I would say in IQ of the whole cycle. Although many analysts start talking about collapse, we treat it like a tail scenario. It could happen if two major things will happen - Reps take Senate and Reps launch their maximum programme, that suggests destructions of financial superstructure (the power center of Dems) that sucks all financial flows and prevents progress in real economy sector. As you understand hardly we will know it until Jan 2023, or even later. Thus, chances on US economy collapse in nearest 1-2 months seems hardly possible.
At the same time, we do not see reasons to deny our 0.9 target. If even Fed will stop hiking cycle and starts QE and US dollar rally will be over, ECB will have to do the same. But EU inflation is 1.5-2% greater than in the US, industry sector stagnating to say the least. The effect of weakness in EU in this case will be stronger. So, general EUR/USD balance should hold. Currently it is absolutely unclear what EU could use to break the tendency and make EUR to outperform the USD. At least, I do not see it.
Technicals
Monthly
Today, guys, I would like to show you different monthly chart. The chart from previous reports is also valid, but it is of a bigger scale. But now I would like to focus on few patterns that could appear soon. Actually I've mentioned this patterns previously, when we've got this thrust down, but you probably forgot about it. Now it is time to recall. November is not closed yet, but potentially, we could get B&B "Sell" pattern on weekly chart. Appearing of DRPO here is hardly possible, just because we do not have fundamental background for major reversal, or we do not know about it. That's why, B&B "Sell" is more logical in current situation and let's focus first on it.
Now price stands above 3x3 DMA, and comes to 1.0580-1.0750 monthly K-resistance. Currently, sentiment on the market is changing and could be fueled by dovish Fed decision in December. Other words speaking, I think that 150 pips is not a big problem for EUR now and it could reach 1.06 level.
MACDP line also stands in this area. Since we have uncompleted 0.9 target, B&B hardly stops just at minimal target, it might become good setup for taking mid term bearish position. Now it is not ready yet and stands in progress, but we need to keep tracking it.
Weekly
Here trend stands bullish and we see rare phenomenon, when financial market breaks K-resistance area in Overbought conditions. In common situation this is mostly impossible. It means that big shifts stand behind, although they are short-term, and this action confirms that EUR could reach 1.06-1.07 monthly level. Meantime, as first reaction is fading gradually, technical picture suggests the pullback. Combination of Obought and K_resistance is not good for new longs:
Daily
Here price is coming to XOP. EUR is Overbought here as well. Once target will be reached, I would consider the H&S shape, as 50% Fib level perfectly fits to the potential left arm's lows. Whatever pullback will be, now anyway is not good point for long entry anyway:
Intraday
Here is we do not have something to do yet, as price action shows no signs of stop. Scalp traders could consider last swing thrust for scalp B&B or DRPO trades, if any will be formed. Longer-term bears need to wait for clear bearish pattern to play the pullback. It takes probably 1-2 sessions at least.
This week, guys, it makes sense to take a look at new inflation data trying to dig it and understand whether indeed it is so good and rates are pivoting. We should discuss elections intermediate results, but it has more relation to politics, thus, we will talk about it tomorrow in gold research. Last time we have taken detailed analysis
of new Fed statement. It was very important and had absolutely different style compares to usual Fed rhetoric. This time CPI numbers has triggered massive rally, which we suggest has more emotional nature rather than economical one. But let's go step by step.
So the dollar fell across the board for a second straight day on Friday, as investors favoured riskier currencies following signs U.S. inflation is cooling that boosted the case for the Federal Reserve to ease off its hefty interest rate hikes. Friday's dollar weakness was an extension of the move set off after Thursday's data showed U.S. consumer inflation rose 7.7% year-on-year in October, its slowest rate since January and below forecasts for 8%.
Still, some strategists warned that dollar bears remain vulnerable to a possible near-term rebound. The dollar found little support from survey data on Friday that showed U.S. consumer sentiment fell in November, pulled down by persistent worries about inflation and higher borrowing costs
Next week Wednesday's U.S. October retail sales should provide markets with a sense of how consumers are faring ahead of the key holiday shopping season. And remember the Federal Reserve is intent on hiking interest rates to contain hot inflation, even if that means a squeeze on consumption in the process.
September data showed a measure of underlying retail sales rising thanks to strong wage gains and savings, even as the broader number came in flat. Analysts polled by Reuters expect a 0.8% increase for October. The good-news-is-bad news crowd would likely see a strong number as evidence that the Fed has more work to do in cooling the economy. That outlook is unlikely to bring joy to markets battered by expectations of more monetary policy tightening this year.
So, about CPI... even White House officials confirm that it was possible to reduce inflation due SPR selling. And, actually nobody makes any secret from this fact. As we've shown many times in our Telegram channel, PSR now stands near lowest levels since 1984 and the time definitely will come when they have to be replenished. So Crude Oil prices could start climbing again back to 100$. So, This is definitely temporal effect, mostly populist for elections purposes.
Besides of SPR, there are other factors for inflation decreasing. First is the comparison base of the last year. It is very high. In October 2021, US inflation was 0.86%. It means that YoY comparison gives less difference, and change is smaller because of big jump in October 2021. Although major components (as you will see below) has not changed drastically.
Raw materials prices are dropping while logistics chains are recovering (the average cost of freight has fallen to the levels of 2019), the commercial ports functioning is gradually normalizing. And production inflation for intermediate products has turned down since July as well. We've talked about it last time.
Inflation expectations have been declining for four months now, according to surveys of the Fed's regional divisions among the five Federal Reserve banks (Dallas, Kansas City, New York, Philly and Richmond Fed). The aggregated index of inflation expectations correlates with inflation (lag 3 months).
The real US money supply is declining at a record pace. The cycle of staff layoffs begins – first of all, it affects the technology sector, then other sectors. Finally the pace of Fed tightening is a record for 42 years, this will inevitably affect investments and with a lag of 3-4 months for employment, the level of wages – all this will be directly reflected in the final demand in the economy.
If we take a look at the components, the core CPI (Ex. food and oil) shows 6.31%. We have slowdown in food to 0.4% MoM from 0.9% in last 4 months. At the same time public catering is growing at a record pace by 0.94%.
Traditionally, low inflation shows education (0.12% mom), telecommunications services ("-0.06%") and computers/components ("-0.2%" ) – in October there was zero price change. Prices for medicines and medical services are decreasing as well for "-0.5%".
Due to the slowdown in demand for real estate, the inflationary impulse in furniture, tools and building materials was "broken" - 0% mom, lower prices for gas and electricity led to a decrease in utility bills by 0.37%, but rent is still growing by 0.75% mom, and it contributes a 25% in the structure of inflation.
New cars are rising in price (+0.37%), and used cars are declining (-2.42%), fuel prices have increased by 4%. Prices in the culture, sports and entertainment industry are rising by 0.75% mom due to a shortage of labor.
That's being said together with short-term disinflationary factors that we've mentioned above we have long–term and more stable factors – a decrease in labor productivity, a significant imbalance in supply and demand (demand must fall by 8% to stabilize), a shortage of labor by at least 7-8 million people, a decrease in the quality of labor - all this accelerates wages. Inflation is becoming more stable as expenses spread across the entire range of goods and services. Initial claims, by the way has raised again this week:
The victory over inflation is still far away, but there is a temporary slowdown. Could recent rally become a starting point of major changes in market direction? This suggestion is doubtful. Usually, the major factors for this are - changes in fiscal and monetary policy and changes in the phase of the investment cycle. We do not have anything of this yet.
The tightening of the Fed policy still in the phase of acceleration and there are no prepositions for easing in the coming year. On Thursday, the Fed "screamers" (Logan, Meister and George) have come with the general narrative that it would be advisable to slow down the pace of rate hikes in the near future, as it seems that the Fed has accelerated too much.
As a result, expectations for a 4.75% rate on December 14th collapsed from 43% to 19% (now they are around 4.5% already), While on February 1st, 2023, the most expected solution now is 4.75% with a probability of 49% (jumped up from 25% before CPI report).
So currently market bets on 0.5% change in December 14 and 0.25% on February 1. We've mentioned this scenario previously. It seems that that 4.75% will be the terminal rate where the crisis will stand in full growth. We could not see the 5% level at all. But what the problem if Fed is coming to pivot?What is the inadequacy of the market?
In fact, market participants have formed an impulse with expectations that the victory over inflation has already happened, which is totally an absurd. There is still a very long way to go, and failures and bankruptcies will inevitably begin on this path, because the measure of the survivability of the system is very low and a very limited number of economic agents will withstand such a stress test. In the 70s, a local slowdown in inflation was a typical phenomenon, after which new inflationary highs were rewritten.
Economists suggest that there is no stable upward momentum and it just cannot be. Because to get this momentum, there must be a return to the past reality of monetary madness with uncontrolled printing. While the investment cycle, and consumer activity, must be restarted. That's not going to happen now.
The crisis is just beginning. A local slowdown in inflation is followed by a debt crisis, a contraction in investment activity and a collapse in consumer demand. So what the background for growth do we have? Credit card interest rates in the United States are rising to the highest in 30 years. Credit card debt has also reached an all-time high... $930 billion.
Elon Musk told Twitter employees that he can't predict for how long the company's funds would be enough for full-fledged work, and that the issue of the company's bankruptcy might come up later. Don't forget all the Digital Giants have started mass layoffs. Everything is OK and with high degree of certainty we could say that new lows are ahead.
Recent FTX scandal is coming out of just financial borders. Now it gets features of corruption and could lead to bad consequences for the whole crypto market and even to Dems. More signs appearing that Dems could have illegal financing of operations via FTX Group using crypto currencies and G. Gensler (SEC CEO) is involved in this crime. Probes are just have started but this stuff already smells bad. As you understand, many companies that could be hurt in this act and trigger chain reaction in financial sector. So, the echo could spread wide.
And we do not mentioned yet the rate disbalances. Actually we've provided earlier information on US debt expenses and Fed operational loss that will keep rising. Fed has to pay big rates on banks' reserves but gets financing on old debt that has low rates. If we get 4.75% rate then Fed should get 50 Bln of operational loss per week!
Second problem is - banks do not provide loans to real economy sector, because of big risks and prefer to get good return on risk-free Fed deposits. Why to give loans to industry companies for a few years if you could get the same 4%-4.5% return daily? Thats the reason to believe that as soon as February-March 2023, the crisis processes will rise to full growth, where talks will begin about the inevitable easing of monetary policy and maybe start of the next QE. Inflation should remain high, so this will be an interesting moment...
Speaking about the Europe - we do not have better situation there. Fed definitely has more tools and levers to drive the situation. New Germany inflation data just shows that bad things are happening. The graph shows a significant deviation of industrial orders over industrial production, which has become a record in history. Demand ended, and in September 2022 we see a severe collapse of orders, which indicates future problems with production. De-industrialization of Europe will begin in early 2023 on a wave of a worldwide demand drop and rising costs.
Inflation in EU and in Germany, in particular, is still accelerating. This week CPI hits 10.6% - highest level of total 70+ years observation history.
So, the bottom line is - crisis shows "normal" progression and we stand somewhere in the beginning of the process, I would say in IQ of the whole cycle. Although many analysts start talking about collapse, we treat it like a tail scenario. It could happen if two major things will happen - Reps take Senate and Reps launch their maximum programme, that suggests destructions of financial superstructure (the power center of Dems) that sucks all financial flows and prevents progress in real economy sector. As you understand hardly we will know it until Jan 2023, or even later. Thus, chances on US economy collapse in nearest 1-2 months seems hardly possible.
At the same time, we do not see reasons to deny our 0.9 target. If even Fed will stop hiking cycle and starts QE and US dollar rally will be over, ECB will have to do the same. But EU inflation is 1.5-2% greater than in the US, industry sector stagnating to say the least. The effect of weakness in EU in this case will be stronger. So, general EUR/USD balance should hold. Currently it is absolutely unclear what EU could use to break the tendency and make EUR to outperform the USD. At least, I do not see it.
Technicals
Monthly
Today, guys, I would like to show you different monthly chart. The chart from previous reports is also valid, but it is of a bigger scale. But now I would like to focus on few patterns that could appear soon. Actually I've mentioned this patterns previously, when we've got this thrust down, but you probably forgot about it. Now it is time to recall. November is not closed yet, but potentially, we could get B&B "Sell" pattern on weekly chart. Appearing of DRPO here is hardly possible, just because we do not have fundamental background for major reversal, or we do not know about it. That's why, B&B "Sell" is more logical in current situation and let's focus first on it.
Now price stands above 3x3 DMA, and comes to 1.0580-1.0750 monthly K-resistance. Currently, sentiment on the market is changing and could be fueled by dovish Fed decision in December. Other words speaking, I think that 150 pips is not a big problem for EUR now and it could reach 1.06 level.
MACDP line also stands in this area. Since we have uncompleted 0.9 target, B&B hardly stops just at minimal target, it might become good setup for taking mid term bearish position. Now it is not ready yet and stands in progress, but we need to keep tracking it.
Weekly
Here trend stands bullish and we see rare phenomenon, when financial market breaks K-resistance area in Overbought conditions. In common situation this is mostly impossible. It means that big shifts stand behind, although they are short-term, and this action confirms that EUR could reach 1.06-1.07 monthly level. Meantime, as first reaction is fading gradually, technical picture suggests the pullback. Combination of Obought and K_resistance is not good for new longs:
Daily
Here price is coming to XOP. EUR is Overbought here as well. Once target will be reached, I would consider the H&S shape, as 50% Fib level perfectly fits to the potential left arm's lows. Whatever pullback will be, now anyway is not good point for long entry anyway:
Intraday
Here is we do not have something to do yet, as price action shows no signs of stop. Scalp traders could consider last swing thrust for scalp B&B or DRPO trades, if any will be formed. Longer-term bears need to wait for clear bearish pattern to play the pullback. It takes probably 1-2 sessions at least.
