Anil’s Analysis w/e July 07 2023

A short but strange week where the alignment of the 4th July holiday together with the publication of the FOMC minutes and the NFP data had made this the only week outside of Xmas/NYE where we could have simply taken the whole week off and not think of trading. 

The week was the start of H2 of 2023, where it had already seen Nasdaq achieve its biggest first half gain in 40 years, rising 31.7%. Economic data has been an outsized mover of markets in recent months as investors parse each new report for clues on the strength of the U.S. economy. And despite the holiday, we had plenty of Econ news this week.

We started the week with a half day of trading, and the first set of data showed the U.S. JUN ISM manufacturing index unexpectedly fall -0.9 to 46.0, weaker than expectations of an increase to 47.1 and the steepest pace of contraction in more than three years. June marked the eighth consecutive month below the threshold of 50 that indicates contraction, representing a continuation of the downward trend that began in June 2022 and the slump reaching levels last seen when the economy was reeling from the initial wave of the COVID-19 pandemic.

On the positive, the May construction spending rose +0.9% m/m, stronger than expectations of +0.6% m/m. Unfortunately this was the only positive news of the econ data which had refused to join in the holiday spirit and on its return we received the May factory orders data which only rose +0.3% m/m, weaker than expectations of +0.8% m/m. This was followed by the hawkish FOMC minutes of the JUN meeting with the now expected FED comments where hawkish statements from New York Fed President Williams said the incoming data the Fed has seen so far support the hypothesis that the Fed has more work to do on monetary policy. This was further supported by Fed Res Bank of Dallas President Lorie Logan when she stated that there was a case for a rate rise at the June policy meeting affirming her view that more rate increases will be needed to cool off a still-strong economy. As a result investors still largely expect the central bank to raise rates at its meeting later this month.

Prior to the arrival of the NFP data, we first received the data showing the May trade deficit shrank to -$69.0 billion from -$74.4 billion in Apr, right on expectations and the JUN ISM services index rose +3.6 to a 4-month high of 53.9, stronger than expectations of 51.2.  When the NFP finally arrived, it showed a rise of 209k, weaker than expectations of 230k and the smallest increase in 2-1/2 years. Also, May nonfarm payrolls were revised lower to 306k from the initially reported 339k. The Jun unemployment rate fell -0.1 to 3.6%, right on expectations.

This was the lowest nonfarm payrolls reading since the April 2020 COVID crash and only the second negative surprise in the last twelve months. Digging deeper into the data, private payrolls missed the mark by a mile, landing at 149k, 51k fewer than economists projected and 70% below what Thursday's ADP data suggested. Additionally the average hourly earnings in JUN rose +0.4% m/m and +4.4% y/y, stronger than expectations of +0.3% m/m and +4.2% y/y.

Although weaker-than-expected, Friday’s payrolls report was seen as not weak enough to dissuade the Fed from not raising interest rates at this month’s FOMC meeting. This is because whilst the smaller than expected rise in the NFP may ease the concerns on the potential rate increase, the real fly in the ointment was wage growth.

Average hourly earnings repeated May's upwardly revised 0.4% monthly and 4.4% annual growth, providing not only a grim first look at June inflation, but also the last bit of ammunition the Fed could possibly need to move forward with another 25 basis point interest rate hike at the conclusion of this month's policy meeting.

Further afield from the U.S., the broader market was under pressure after weaker-than-expected news on China’s services industry sparked concerns about the outlook for the global economy. The China Caixin Jun services PMI fell -3.2 to a 5-month low of 53.9, weaker than expectations of 56.2.

The week also saw the U.S Treasury secretary, Yellen touch down on Wednesday to start a three-day China visit and despite the balmy 36 degrees Celsius in Beijing, Yellen arrived to a  decidedly frosty atmosphere as China announced a perfectly timed warning that it would control the exports of gallium and germanium, metals widely used in the semiconductor industry.  Whilst China says it's not targeting any particular country, the United States - with help from somewhat less-keen allies in Japan and the Netherlands - has ramped up restrictions on chip-tech trade with China for months. Expect the ongoing tensions between Beijing and Washington over access to high-tech microchips to rise further. 

Despite the short week, the markets gave up a good amount of its gains with all major indexes declining in unison led by the DoW which remains in a conso between the ranges of its w50MA Supp and the wCAT Res above which it has visited several times. 

Both the S&P and Nasdaq are potentially pulling back to the Weekly high of AUG22 that it BO few week ago. On the daily both indexes are posting a pretty looking ST C&H. 

The volatility index saw a spike up on Thursday to briefly breach the d50MA Res before returning back below this zone. Nevertheless, the weekly average for VIX has returned back over RN14.  Short selling remains nearby its median and the GS Growth fund maintains its recent strength despite a small decline this week and is also posting a ST C&H to match he S&P and Nasdaq.

In the UK, the FTSE is now on its worst run giving up all of its 2023 gains to close at its lowest point since early NOV22 and is now faced with its WVI/RN7k Supp below as its potential saviour. 

CABLE has returned to recover the pips it gave up over the last 2 week having bounced off its wPivot from May and is now revisiting its WVI. Should it fail again at this Res, there is potential for a C&H pattern which maybe the catalyst it needs to finally BO above the WVI. 

In the sector ETF's we would have had a clean sweep of Red, only for Real Estate (XLRE) to use its DVI supp to post a Green week. Despite this nothing much has changed from last week in that Finance (XLF) and Industrial (XLI) remain the sectors to watch for opportunities with the latter about to join the former in the Improving quadrant. Technology (XLK) and Discretionary (XLY) remain firmly established in the Leading quadrant. The other to keep an eye on are Real Estate (XLRE) and Materials (XLB) both have moved up halfway in the Lagging quadrant and in the direction of Improving. 

I usually don't reference individual stock on here too often, but a stock frequently mentioned in the past on our forums, Alibaba (BABA) finally has a light at the end of its 2 year tunnel with reports suggesting the Chinese authorities will impose a fine of $984 million on Ant Group, ending a regulatory crackdown on the internet sector after a year-long investigation. Maybe worth just keeping an eye on this, especially if you still hold this stock. 

Next week we will see further Econ data being published with both the CPI and PPI in the U.S and China. The UK will publish its GDP and unemployment count. We also have Rate decision for CAD and NZD during the week.

Have a great weekend!

Anil Dala

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