Anil’s Analysis w/e July 14 2023

This was an important week for the Markets with a number of key Econ Data being published just as we start the Q2 earning season led by the major banks. When the data arrived most of the news flow and input came in better than expected.  The week was also riddled with a number of Fed Res officials commenting and in unison they were largely hawkish.

Investors have been buoyant having turned from fearful to fearless in recent months as the economy has proven to be resilient to the Fed's tightening of monetary policy while inflation has continued to moderate.

The key econ data this week was the CPI and PPI, which both came in better than the Markets had expected.  And whilst both posted the smallest increase in last 2 and 3 years respectively, against the backdrop of tightening monetary policy and a tight labour market, these numbers are seen as a positive since inflation is falling whilst the growth has not yet stalled. The Fed are very likely to embrace these results with open arms as validation that their policies are having the desired effect and most likely won't change their mind to raise interest rates later this month.   

U.S. inflation data, CPI showed a slowdown in the seemingly relentless rise of consumer prices advancing 3.0% in the 12 months through June, down from 4.0% in May and the smallest year-on-year increase since March 2021. The core rate of inflation that omits food and energy rose a mild 0.2% last month for the smallest increase in almost two years. Market had forecasted a 0.3% gain. The annual rate of core inflation decreased to 5% from 5.3% in the prior month.

The JUN PPI final demand eased to +0.1% y/y from +0.9% y/y in May, better than expectations of +0.4% y/y and the smallest pace of increase in 2-3/4 years. Also, JUN PPI ex-food and energy eased to +2.4% y/y from +2.6% y/y in May, better than expectations of +2.6% y/y and the smallest pace of increase in almost 2-1/2 years.

In other Econ data, the weekly initial unemployment claims unexpectedly fell 12k to 237k showing a stronger labour market than the expectations of an increase to 250k.

Wholesale inventories were unchanged in May following a decline in the prior month -- indicating businesses are producing or stockpiling fewer goods due to an uncertain economy.

And consumer sentiment improved more than expected so far in July to the highest level since SEP21. The main gauge of sentiment was 72.6 this month, up nearly 13% from June's print of 64.4. The consensus on Econ day was for a smaller gain to 65.5. Annually, sentiment surged 41%. The sharp rise in sentiment was largely attributable to the continued slowdown in inflation along with stability in labour markets.

The Econ data provided more evidence that inflation pressures were subsiding. Alas, the positive sentiments were regularly countered by a number of Fed officials making hawkish statements starting with the San Francisco Fed President Daly who said the risk of doing too little on rates outweighs doing too much, and with inflation printing too high, the Fed needs to keep raising interest rates. This view was further supported by the Cleveland Fed President Mester who suggested that in order to ensure that inflation is on a sustainable and timely path back to 2%, the funds rate will need to move up somewhat further from its current level and then hold there for a while as more information in accumulated on how the economy is evolving.

And Daly returned again later in the week where she stated it was too soon to declare victory on inflation and that while the Fed has put over 500 bps of tightening in the system over a rapid period of time, the economy still has a lot of momentum and this is why the Fed is going to keep working on rate hikes until its sure that inflation is on a path to come down to 2%.

And not to miss out, Fed Governor Waller stated he sees two more 25 bps interest rate hikes in the target range over the four remaining FOMC meetings this year as necessary to keep inflation moving toward their target.

And finally to ensure there was no doubt in the unity amongst the Fed officials, the Chicago Fed President Goolsbee said recent consumer-price data showing inflation easing was "promising," though inflation is still higher than the Fed's 2% goal. He added that policymakers are on a "golden path" to containing inflation without triggering a recession.

The week ended with the start of the Q2 earning led by the major banks with JPMorgan Chase & Co.(JPM), Wells Fargo & Co.(WFC) and Citigroup Inc. (C) all reported earnings and revenue that beat forecasts. Investors had been eager to hear from those financial giants after a quarter marked by bank failures and interest-rate hikes by the Fed and sees JPMorgan as a big bellweather. Seeing bank profits hold up is an important sign this earnings season.

Following the short trading week last week that saw market in decline and flux, all major indexes returned this week to post healthy gains. Both the S&P and Nasdaq BO of their respective RN Res of 4500 & 14k with BuRPI and are now faced with a cluster wCAT Res from the period AUG21-MAR22. I mentioned last week the potential pretty looking ST C&H both were positing on their daily chart and this week they both completed and then BO of the C&H pattern.

DoW on the other hand has again arrived back up to test the wCAT/RN35k Res it has visited several times over last 12 months and have failed to break thru, maybe eighth time lucky 🙂

In the key metrics, the VIX has retuned back to close below RN14 and dropped its weekly average to just over this RN. Short selling closed below the RN50 for only the second time in over 16months. Stocks above their DVI nudged up again to create room above the RN50. GS Growth fund has fallen into an alternate Bull/Bear week and has posted to its best weekly close since APR22.

In the UK posted is best weekly gain since the end of Q1 but remains below its DVI/RN7500 Res. In econ data, the retail sales grew 4.2% year over year on a like-for-like basis in June, following a 3.7% rise in May. The latest reading reflects consumers' purchase of summer goods as the weather changes. However, it was noted that the accelerated growth was largely due to inflation's upward effect on overall spending amid lower sales volumes.

Despite 13 back-to-back rate rises, Britain remains a hawkish outlier among major economies, and the BOE's task of trying to tame the highest inflation rate in the rich world, while dealing with a super-tight labour market and policy transmission lags, isn't an easy one. Official data showed that Britain's economy contracted by 0.1% in May less than the expected 0.3%.

In other news it seems the UK government plans to boost the London stock market through prospectus reforms designed to accelerate the listing timeline while allowing companies to raise higher proceeds. In his Mansion House speech the UK Chancellor Jeremy Hunt said the goal is for the London bourse to become the "global capital for capital."

The draft legislation for prospectus changes follows the rollback of European Union-era rules prohibiting investment companies from bundling research costs. The requirement is expected to be removed by the first half of 2024.

Furthermore, the UK intends to create a new “intermittent trading venue” to provide private companies better access to capital markets prior to an initial public offering. The new trading platform will be operational before end-2024.

For FX we had NZD which maintained a hold position on its rate decision whereas CAD decided to follow the global trend in increase its rate by 25bps to reach 5%.

CABLE has finally burst thru the RN1.3/WVI Res with some performance. this has been mentioned several time by Javid Shaik and others and has presented ample profitable trading opportunities. Even if you're not following the latest MP criteria and trading off 30min, our previous DST1 charts presented a number of opportunities on the 60min since posting the first of 2 BuRPI at DMA20 on 05JUL and then multiple visits to h50MA. The pair is visiting this zone again and a BuRPI at the h50MA should not be ignored. 

Having visited the RN100 support a few time this year, the USD Basket DXY finally BD this Support to close at the lowest point since early APR22. The basket is now faced with the WVI as its near term saviour to halt the decline. 

The Sector ETF's posted a clean sweep of Green led by a combination of Discretionary (XLY) and Communication (XLC). The weeks poor performer was Energy (XLE) which is the only sector this week that failed to post a gain above 1%. 

Both Technology (XLK) and Industrial (XLI) have posted their highest weekly close. 

Once again nothing much has changed from last week in that Finance (XLF) and Industrial (XLI) remain the sectors to watch for opportunities with the latter now having entered the Improving quadrant. Technology (XLK) and Discretionary (XLY) remain firmly established in the Leading quadrant. The others to keep an eye on remain Real Estate (XLRE) and Materials (XLB) both continuing in the direction of Improving. 

Next week in addition to Econ data across China for GDP, Canada for CPI and UK for CPI, we also have over 500 companies publishing their Q2 earnings. 

Have a great weekend. 

Anil Dala

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