There's been a noticeable change in inflation tendencies since Covid hit. The key question is whether this represents another regime change. CPI and PCE inflation data from the BLS, chart by Mish.  Chart Notes The CPI is a measure of prices directly paid by consumers.  The PCE price index includes expenses paid on behalf of consumers, notably corporate-paid health insurance and Medicare.  Core inflation measures exclude food and energy. The PCE numbers are seasonally adjusted. The CPI numbers are unadjusted. The Great Moderation The great moderation is the term economists use for the regime change starting in 1983 after Fed chairman Paul Volcker allegedly broke the back of inflation by spiking interest rates to 20 percent.  Will High Inflation Persist? Autocorrelation Chart Pre-Great Moderation by St. Louis Fed Credit for this post idea goes to the St. Louis Fed writers Michael McCracken and Trần Khánh Ngân for their article Will High Inflation Persist? Even though inflation started to cool toward the end of 2022, it is still unclear how long it will take to return to its long-run average—that is, if currently high inflation will persist.  Each of the two figures plots the autocorrelation coefficients between year-over-year inflation (measured as the percent change from a year ago of a given index) and inflation at horizons of one month up to 24 months (two years) ahead. The first figure plots autocorrelations before the Great Moderation, which we define as before 1983, while the second figure plots Great Moderation autocorrelations (1983 to present). Pre-Great Moderation, there are some modest differences in the persistence profiles of the headline and core measures of inflation, but overall, inflation is quite persistent even at longer horizons like one and two years into the future. In fact, autocorrelation for each lies above 0.5 two years out, suggesting it could take quite some time before these measures of inflation revert to the mean prior to the Great Moderation. Although all four measures of inflation persistence move closely with one another pre-Great Moderation, there is a clear delineation between the persistence profiles of core versus headline measures during the Great Moderation. As the next figure illustrates, the correlation between future and current inflation in this period declines at a much faster pace for headline CPI and PCE than for core CPI and PCE. Starting at nearly 1 at the one-month-ahead horizon, correlation coefficients remain above 0.7 at the one-year-ahead horizon for both core measures, while they had already dropped well below 0.5 for both headline measures. Autocorrelation of inflation Great Moderation Autocorrelation Chart During Great Moderation by St. Louis Fed What Regime Are We In? Inflation has been less volatile from 1983 to 2020.  Looking ahead, whether inflation persists may depend on which of the two regimes that we are in. In the economic literature, a regime switch occurs when there are significant breaks in the patterns of key macroeconomic variables from one period to the next. "What now?" is the key question. The St. Louis Fed did not offer an opinion but I will.  The regime has changed again. Inflation will be more persistent than most think. Ten Reasons For Persistent Inflation From 1983 on, the Fed had the wind of outsourcing and globalization at its back. Global wage arbitrage kept prices in check.  From 2020 on, the winds of de-globalization started blowing briskly in the Fed's face. President Trump started trade wars that Biden escalated. Trade wars increase prices. Contrary to Trump's claim, trade wars are neither good nor easy to win. Biden is more polite than Trump but is worse in practice. The war in Ukraine further disrupted supply chains. For example, the EU got most of its natural gas from Russia. Now the EU gets Liquid Natural Gas (LNG) from the US. That gas has to be compressed (liquified) then shipped across the ocean via diesel freight liners. This makes no economic sense but is set to continue. Biden's Inflation Reduction Act (IRA) is an illegal (by WTO rules) trade war in disguise. It's an "America First" plan that Trump would have been proud of. It's also in violation of WTO rules. Expect the EU to counter with an "EU First" plan.  The IRA's "America First" idea cannot possibly work given the minerals and materials needed have no trade-friendly source. Decarbonization is highly inflationary. We have neither the natural resources nor the infrastructure to make decarbonization work.  The US seeks to neutralize both Russia and China. But the attempt to neutralize Russia over the war in Ukraine drove Russia into China arms and increased energy costs across the board.  White House policy is effectively set by Progressives. Elizabeth Warren may as well be president given she is setting energy policy and student debt cancellation policy along with other inflationary giveaways.  Boomer retirements are wreaking havoc on...

EUR/USD climbs to a fresh multi-month top and draws support from a combination of factors. The recent hawkish ECB rhetoric underpins the Euro and remains supportive amid a weaker USD. Bets for smaller Fed rate hikes continue to weigh on the buck ahead of the US CPI on Thursday. The EUR/USD pair remains well supported by a combination of factors and holds steady near its highest level since late May through the Asian session on Thursday. The recent hawkish rhetoric from several European Central Bank (ECB) policymakers continues to benefit the shared currency. This, along with the prevalent US Dollar selling bias, acts as a tailwind for the major. French central bank governor Francois Villeroy de Galhau said on Wednesday that interest rate hikes would need to be pragmatic in the coming months. Furthermore, ECB Governing Council member Olli Rehn said that several more significant rate hikes are required to restrict growth and dampen inflation. Separately, ECB policymaker Robert Holzmann noted that policy rates would have to rise significantly further to reach sufficiently restrictive levels to ensure a timely return of inflation to the 2% target. The Federal Reserve, on the other hand, is expected to soften its hawkish stance amid signs of easing inflation. The bets were lifted by last week's US monthly jobs report (NFP), which showed a slowdown in wage growth during December. Furthermore, business activity in the US services sector hit the worst level since 2009 and suggested that the effects of the Fed's significant rate hikes in 2022 are being felt in the economy. This fueled speculations that the Fed will slow the pace of its policy tightening and weigh on the US Treasury bond yields. The yield on the benchmark 10-year US Treasury note drops to a nearly four-week low and continues to undermine the buck. The prevalent risk-on environment, fueled by the latest optimism over China's pivot away from its zero-COVID policy, further dents the greenback's relatively safe-haven status. Traders, however, seem reluctant to place aggressive bets and prefer to move to the sidelines ahead of the release of the US consumer inflation figure, due later during the early North American session. The crucial US CPI report will play a key role in influencing the Fed's rate-hike path and driving the USD demand in the near term. The Fed policymakers have indicated that they remain committed to combat high inflation and that rates could stay elevated for longer or until there is clear evidence that consumer prices are falling. Hence, a more robust US CPI print will lift bets for a more hawkish Fed and push the USD higher. That said, narrowing the Fed-ECB rate differential should help limit any deeper losses for the EUR/USD pair. Technical Outlook From a technical perspective, the occurrence of the golden cross (50-day SMA moving above 200-day SMA) also favours bullish traders. Moreover, positive oscillators on the daily chart, which are still far from being in the overbought territory, support prospects for a further near-term appreciating move. Hence, some follow-through strength beyond the 1.0800 mark, towards testing the next relevant hurdle near the 1.0855 region, looks like a distinct possibility. The momentum could extend further and allow the EUR/USD pair to reclaim the 1.0900 round figure for the first time since April 2022. On the flip side, the 1.0730 horizontal zone now protects the immediate downside ahead of the 1.0700 mark. Any further decline will attract fresh buyers and remain limited near the 1.0650-1.0645 support zone. That said, failure to defend the said support levels might prompt some technical selling and make the EUR/USD pair vulnerable to weakening further below the 1.0600 mark. Spor prices could then slide to test the 1.0540-1.0535 support zone en route to the 1.0500 psychological mark and the monthly low, around the 1.0480 region. The latter should act as a pivotal point, which, if broken decisively, will shift the near-term bias in favour of bearish traders.

In his first public appearance of 2023, US Federal Reserve Chair Jerome Powell participated in a panel discussion (Central bank independence and the mandate – evolving views) on Tuesday and reiterated the Fed’s commitment to contain inflation. Powell added that ‘restoring price stability when inflation is high can require measures that are not popular in the short term as we raise interest rates to slow the economy’. However, comments on upcoming policy moves were minimal. Early trading on Wednesday saw Aussie retail sales jump in November as inflation surprised markets to the upside, climbing to 7.3% in the 12 months to November, up from 6.9%. The Reserve Bank of Australia will meet for the first time this year on 7 February, projected to increase the Cash Rate by 25 basis points. Today’s inflation data out of the US serves as the macro highlight for the week. The consensus heading into the event forecasts a 6th deceleration to 6.5% in the 12 months to December, with a forecast range spanning between a 6.8% high and a 6.3% low, down from 7.1% in November. Technical View for Key Markets EUR/USD Resistance in View As seen from the weekly timeframe, the late pullback from the $0.9536 low at support from $0.9606 has seen the currency pair come within striking distance of Quasimodo support-turned resistance at $1.0778 this week. This represents healthy resistance, though a break higher could clear the path for a test of weekly resistance from $1.1174. Meanwhile on the daily timeframe, price action eventually discovered a floor around the support level at $1.0602, aided by the relative strength index (RSI) rebounding from the 50.00 centreline support. The unit is now poised to shake hands with prime resistance coming in from $1.0954-1.0864, arranged above the noted weekly resistance level. Across the page, the H1 timeframe shows price connected with a Quasimodo resistance at $1.0764 in recent hours, sheltered just beneath the $1.08 psychological handle. To the downside, $1.07 calls for attention, followed by Quasimodo resistance-turned support at $1.0691. Thus, between the two aforementioned resistance levels is an area sellers could welcome, considering the connection this zone has with weekly resistance noted above at $1.0778. Amazon Breakaway Gap North Daily Timeframe: Following a 50.0% slump last year, could things be on the up for Amazon? After price bottoming at a weekly Quasimodo support from $83.60, just ahead of a daily AB=CD bullish pattern (the 100% projection at $77.21), Wednesday witnessed a breakaway gap higher, one that forged a breakout above trendline resistance, taken from the high $146.57. Up 4.5% as of current trading, the share price has scope to extend recovery gains until meeting with resistance priced in at $101.44. Technicians may acknowledge a breakout above a falling wedge also occurred, drawn from between $103.79 and $85.87. This is a reversal structure, with many traders often taking the base value and adding this to the breakout point (orange rectangles) to calculate a profit objective, which, in this case, is set at $106.97, fixed just north of the resistance noted above at $101.44. Interesting Technical Structure on Ripple (XRP/USD) Kicking off with the H4 timeframe, it is clear to see the altcoin has run into familiar resistance in recent trading at $0.3722. To reach this level, you will see that a descending resistance was consumed, drawn from the high $0.4183. On the M15 timeframe, we have a potential AB=CD bullish structure forming off the H4 resistance which could draw price movement to retest the breached descending resistance-turned support mentioned above. Assuming bulls remain in control, further buying in this market could pull the action beyond $0.3722 to a H4 Quasimodo resistance at $0.3900. Copper Futures Tearing Higher Daily Timeframe: Trading higher for a 5th consecutive daily session, copper futures recently broke to the upside in dominant fashion. Given the base metal’s ability to forecast economic health (Doctor Copper), a rise in copper prices is generally viewed as a positive for the economy. Technically, however, trouble could be overhead. A Fibonacci cluster is positioned between $4.31 and $4.26, which happens to share space with a channel resistance, taken from the high $3.96. The relative strength index (RSI) also displays overbought conditions, testing indicator resistance at 73.68 (its highest level since March 2022). Therefore, given the position of price on the daily scale, buyers could remain at the wheel for the time being, at least until the noted Fibonacci cluster.

Annual CPI in the US is forecast to decline to 6.5% in December. Markets remain optimistic about a policy pivot despite hawkish Fed commentary. EUR/USD and USD/JPY are likely to react significantly to inflation data.  The US Dollar Index has been moving in a downtrend since early October with investors anticipating a less aggressive policy tightening by the Fed in light of soft inflation readings. On Thursday, January 12, the US Bureau of Labor Statistics will release the Consumer Price Index (CPI) data for December. Investors expect the annual CPI to decline to 6.5% from 7.1% in November and see the Core CPI, which excludes volatile food and energy prices, edging lower to 5.7% from 6%. On a monthly basis, the CPI is forecast to stay unchanged while the Core CPI is projected to rise 0.3%. Following the December policy meeting, the US Federal Reserve’s revised Summary of Projections (SEP) showed that policymakers’ median view of the policy rate at end-2023 rose to 5.1% from 4.6% in September’s SEP. Currently, the CME Group FedWatch Tool shows that markets are pricing in a nearly 80% probability of the Fed raising its policy rate by 25 basis points to the range of 4.5-4.75% in February.  Although Fed policymakers have been pushing back against the market expectation for a policy pivot in late 2023, the recent action in the US Treasury bond yields and the US Dollar Index suggests that investors are not convinced. The yield on the benchmark 10-year US Treasury bond is already down nearly 8% in January. Market implications The initial market reaction to inflation figures should be straightforward with a smaller-than-expected increase in monthly Core CPI weighing on the US Dollar and vice versa. Underlying details of the report will help investors figure out whether the impact on the US Dollar can be long-lasting.  While responding to questions at the post-meeting press conference in December, FOMC Chairman Jerome Powell noted that they will be keeping a close eye on non-housing core services inflation moving forward. Hence, the “Services less energy services” item of the CPI will be key, which rose 0.4% in November and stood at 6.8% on a yearly basis. In case the monthly Core CPI comes in lower than expected but this component rises at a strengthening pace, the US Dollar’s losses could remain limited following the immediate reaction. On the flip side, a hot Core CPI reading combined with a strong increase in the “Services less energy services” item should cause investors to reassess the possibility of a Fed policy pivot and trigger a steady recovery in the US Dollar. Assets to watch If the US Dollar sell-off picks up steam after the inflation report, USD/JPY and EUR/USD pairs are likely to offer better trading opportunities than GBP/USD. The European Central Bank adopted a surprisingly hawkish stance after the December meeting and markets anticipate the Bank of Japan (BoJ) to take a tightening step following its decision to tweak the yield curve control strategy heading into 2023. On the other hand, the Bank of England made it clear that it’s nearing the end of its tightening cycle. Market participants will also keep a close eye on Gold price. XAU/USD benefited from retreating US T-bond yield and started the new year on a firm footing. A strong rebound in yields could weigh heavily on the inversely-correlated pair. In case the 10-year US T-bond yield drops below 3.5% after the data, Gold price could target new multi-month highs near $1,900.

Join Senior Market Strategist & Trading Mentor Duncan Cooper as he watches price levels on the EURUSD weekly and daily charts.

Gold price replicates Tuesday’s Asian trading move so far this Wednesday. Fed Chair Jerome Powell offers relief to markets, keeps US Dollar on the back foot. US Treasury bond yields ease as Gold price awaits the United States Consumer Price Index data. Gold price confirms Golden Cross, a test of the $1,900 mark remains on the cards. Gold price is trading listlessly, consolidating below the eight-month high of $1,881 amid quiet trading this Wednesday. Gold price replicates the move seen during Tuesday’s Asian session amid a pause in the United States Dollar (USD) downside momentum. Federal Reserve Chair Jerome Powell fails to lift US Dollar The United States Dollar is extending its downside consolidative mode into the second day on Wednesday. Risk flows remain in vogue and weigh negatively on the safe-haven US Dollar as investors breathe a sigh of relief after US Federal Reserve President Jerome Powell refrained from touching upon monetary policy outlook while participating in a panel discussion at a Riksbank event on Tuesday. Markets expected Federal Reserve Chair Powell to maintain its hawkish stance, pushing for higher rates for longer to battle inflation. Investors anticipated Powell to join the chorus of his colleagues, especially after San Fransisco Fed President Mary Daly and Atlanta Federal Reserve President Raphael Bostic boosted expectations of a peak rate above 5.0% later this year. Meanwhile, Federal Reserve Governor Michelle Bowman said on Tuesday that the United States central bank would have to raise interest rates further to combat high inflation, likely leading rates further to combat high inflation and that would lead to softer job market conditions. His comments did little to alleviate the bearish pressure on the US Dollar, which allowed the Gold price to hold the higher ground. However, the downside in the US Dollar remained cushioned, courtesy of a recovery in the United States Treasury bond yields across the curve. The risk rally on global markets drained flows from the US government bonds, spiking up the US Treasury bond yields. The benchmark 10-year US Treasury bond yields rebounded after testing the key 3.50% level. Gold price awaits United States Consumer Price Index data With Federal Reserve Chair Jerome Powell’s appearance out of the way, all eyes remain on the critical United States Consumer Price Index (CPI) data due to be published on Thursday. The US calendar lacks any high-impact economic release on Wednesday; therefore, Gold traders will refrain from placing any big directional bets ahead of the key US data. The US Consumer Price Index is seen easing to 6.5% YoY and 0% MoM in December, while the Core figures are seen at 5.7% and 0.3%, respectively, in the reported period. The continued softening of the US Consumer Price Index (CPI) could allow the Federal Reserve to slow down its tightening pace. The US Consumer Price Index holds the key to determining the Federal Reserve’s policy move as soon as the start of next month. At the moment, markets are pricing roughly 80% odds of a 25 basis points (bps) rate hike by the Federal Reserve at its February policy meeting, the CME FedWatch Tool showed. Gold price technical analysis: Daily chart Nothing has changed technically for the Gold price, as bulls keep looking out for acceptance above the multi-month peak at $1,881. The $1,900 threshold will be next in sight of Gold buyers, above which doors will open toward May 2022 high at $1,910. The 14-day Relative Strength Index (RSI) is seen lurking beneath the overbought territory, keeping bulls hopeful. Adding credence to the bullish potential, the upward-sloping 50-Daily Moving Average (DMA) managed to close Tuesday above the mildly bearish 200DMA, confirming a Golden Cross.    On the flip side, failure to yield a daily closing above the $1,880 level could offer much-needed respite to Gold sellers. Friday’s low at $1,865 will be the immediate support thereon.   Further down, the $1,850 psychological level will be a tough nut to crack for Gold bears.

While Asia stocks are trading higher on the path of least resistance thanks to the China reopening, US futures are mostly treading water today but maintaining overnight gains as we move through a valley between peaks of new information.  After ringing in the new year with the most peculiar data combination of a resilient labour market set against eroding business confidence, US futures are idling as we await the next round of macro and micro data inputs. With CPI dead square on the radar. European markets should catch an updraft from Asia stocks. At the same time, a tempering in US inflation expectations. should boost the Euro's appeal attracting more inflows as international investors grow increasingly more confident in the Euro's direction as the US dollar's safe-haven appeal erodes. FX and the gold markets continue to price in the "writing on the wall" trade. With automotive fuel prices down by over 12% in December, headline inflation will drop; hence the Fed should be less aggressive, supporting a potential re-steepening in the US yield curve and a clear signal to sell the US Dollar. And then all ships should rise. The question is really by how much CPI falls below consensus. Although many economists' lucky black balls have been well off the mark with their inflation projections, I suspect this is one of the easier prints to forecast, so the delta may not be that extreme, hence the market reaction won't be too violent Note the market reacts to the difference between data expectations vs data actualizations.

Stock investors are treading lightly ahead of several key events this week, including remarks from Federal Reserve Chair Jerome Powell today, critical inflation data due on Thursday, and the "unofficial" start of Q4 2022 earnings season on Friday. Powell Some Wall Street bulls are nervous that Powell today could surprise with another hawkish outlook for the Fed, although most expect him to steer clear of any meaningful policy talk. It's worth noting that the monthly survey from the New York Federal Reserve released yesterday shows that consumer expectations for inflation fell to the lowest level since July of 2021 while spending expectations fell a full percentage point to the lowest level since January 2022. Bulls believe the declines are yet more justification for the Fed to ease up on its current tightening campaign. Other recent data continues to paint a mixed picture of the US economy and fuel wide divisions on Wall Street about future Fed policy as well as the prospects for stock gains in 2023. Labor market On the positive side, inflation gauges continue to decline, consumer spending and job growth is holding up, and home prices have sustained sizable gains despite the softening market. The downside is that inflation is still more than double the Fed's +2% target rate, consumers are racking up considerable credit card debt, the US manufacturing and services sectors have sunk into contraction territory, and businesses are still struggling to attract workers as wage gains eat into margins. Overall, the strong job market and consumer spending are viewed as a welcome sign that the Fed can still guide the economy toward a "soft landing," meaning defeat inflation without sending the economy into a recession. Still, many Wall Street insiders remain concerned that the Fed is not paying enough attention to the contractions already happening in the economy and will go too far with interest rate hikes. Some economists are also warning that the Fed's focus on the labor market may be misguided as job losses tend to become more of a problem once recession hits rather than providing a warning signal beforehand. Bottom line, many investors are worried that the economy is right on the edge of weakening to a point that a "soft landing" will be impossible. CPI The Consumer Price Index on Thursday will provide an update on the inflation situation with consensus expecting another monthly decline. The only data due today is the NFIB Small Business Optimism Index. On the earnings front, Q4 results "unofficially" begin on Friday with big Wall Street banks, although some results have already started to trickle in. Alberstons is the highlight today. According to FactSet, of the 100 S&P 500 companies that have issued quarterly guidance for Q4, 65 have been negative‚ which is above the five-year average of 57.

EUR/USD jumps to a fresh multi-month high amid sustained USD selling on Monday. Diminishing odds for more aggressive Fed rate hikes continue to weigh on the buck. The golden cross supports prospects for a further appreciating move. The EUR/USD pair gained strong follow-through traction for the second day on Monday and shot to a seven-month high amid sustained US dollar selling. The US monthly jobs report released last Friday pointed to the slowing in wage growth and that inflationary pressures could weaken. Furthermore, the US ISM Services PMI dropped into contraction territory in December and hit the worst level since 2009. The data suggested that the effects of the Fed's aggressive policy tightening last year are already being felt in the economy and lifted bets for smaller rate hikes in coming months. This led to a further decline in the US Treasury bond yields and continued weighing on the buck. Apart from this, the latest optimism over China's biggest pivot away from its strict zero-COVID policy undermined the safe-haven greenback and provided an additional lift to the EUR/USD pair. China opened its sea and land border crossings with Hong Kong over the weekend for the first time in three years. Investors, however, remain worried that the massive flow of Chinese travellers may cause another surge in COVID infections. Apart from this, the protracted Russia-Ukraine war has fueled concerns about a deeper global economic downturn and kept a lid on optimism. This was evident from the overnight slide in the US equity markets and helped limit losses for the USD. Nevertheless, the EUR/USD pair finally settled with substantial intraday gains, just a few pips below the multi-month peak, and held steady above the 1.0700 mark through the Asian session on Tuesday. Without any major market-moving economic releases, the USD price dynamics will continue to play a vital role in influencing the major. Hence, the focus remains glued to Fed Chair Jerome Powell's speech. Investors will look for fresh clues about the pace of Fed rate hikes at the upcoming meetings. This will drive the USD demand and produce short-term opportunities around the pair ahead of the latest US consumer inflation figures, due for release on Thursday. Technical Outlook From a technical perspective, a sustained move and acceptance above the 1.0700 mark could be a fresh trigger for bullish traders. Furthermore, the occurrence of the golden cross (50-day SMA moving above 200-day SMA) supports prospects for a further near-term appreciating move. Some follow-through buying beyond the overnight swing high, around the 1.0760 area, will reaffirm the positive outlook and allow the EUR/USD pair to reclaim the 1.0800 round figure. The momentum could extend further towards the next relevant resistance near the 1.0855 zone. On the flip side, the 1.0700 mark could now protect the immediate downside ahead of the 1.0650-1.0645 region. Failure to defend the said support levels might prompt technical selling and make the EUR/USD pair vulnerable to weaken further below the 1.0600 mark and test the 1.0540-1.0535 support zone. This is followed by the 1.0500 psychological mark and the monthly low, around the 1.0480 region, which, if broken decisively, will shift the near-term bias in favour of bearish traders.

The US Inflation number is fast approaching. This has been of the main drivers of the recent tremendous start of year rally in US and global stock markets. It is virtually a given and certainly expected by market participants that inflation will decline yet again and significantly. This is all very probabl.Though anything can happen with surveys? Which after all is all any economic data release represents. Nevertheless, it should be a number that is welcomed. The market is expecting 6.7%. Down from the previous 7.1%. Gasoline and energy prices have corrected and this should be about right. My forecast is nearer 6.9%. Stocks will rally, but should they? So far, the very large institutions have been avoiding the thin holiday markets, but will begin to return with more force next week. It is likely they have continued to receive redemptions, and some fresh selling pressure could be expected on this basis. The real problem will come with the again, and repetitively so, false hopes of some kind of Fed pivot during the year. When in fact, the very best that can be hoped for is a slowing and pause of rate hikes. We could even see a further 3-5 50 point rate increases this year. Then, at whatever level the Federal Reserve finally pauses, they will be sitting on their hands for a very long time. My forecast for the Fed Funds Rate remains in the 5.75% tp 6.5% region, followed by an 18 month to 2 year holding pattern. Even with a lower inflation rate, it is still stubbornly too high for the Fed’s comfort. Markets are likely to be seriously disappointed. The whole idea too, that a weakening economy is good for US stocks, is another total nonsense. Earnings, after having been driven higher in recent years by the entirely artificial forces of ridiculous near zero rates and massive government bond buying and handouts, are now reverting to the real economy as their basis in growth. The negative economy, the US was already heading into another recession in December, means negative earnings. Investors should focus on the risk scenario that markets are not fully pricing how high for how long rates will actually be, nor anywhere near the full nature and extent of the slow-down. Both in degree and duration. Markets are actually looking across a mist filled abyss, as if it were just another walk in the park small valley crossing. The view expressed within this document are solely that of Clifford Bennett’s and do not represent the views of ACY Securities. All commentary is on the record and may be quoted without further permission required from ACY Securities or Clifford Bennett. This content may have been written by a third party. ACY makes no representation or warranty and assumes no liability as to the accuracy or completeness of the information provided, nor any loss arising from any investment based on a recommendation, forecast or other information supplied by any third-party. This content is information only, and does not constitute financial, investment or other advice on which you can rely.

Equity markets have got off to a flier this year despite concerns over a slowing global economy, and central banks that look set to hike rates even further in the coming weeks. The IMF has come across as equally as gloomy about the outlook saying that they expect that a third of the global economy will fall into recession in 2023. Despite these concerns and a steady increase in interest rates since the October lows, equity markets saw a strong end to 2022 and this has continued into 2023, however it is notable that markets in Europe are outperforming those in the US. This disconnect is no better illustrated than in the chart below which has seen the Nasdaq 100 and S&P500 struggle to keep track of the FTSE100 and DAX. Equity market performance since October lows Source: CMC Markets The DAX has led the way, rebounding by 20% from its October trough, while the FTSE100 has also performed well, as US markets have struggled, even though yields across all the major markets have moved higher as future rate rises on both sides of the pond continue to get priced in. This continued expectation of higher rates appears to be being tempered by the prospect that central banks are closer to the end of their hiking cycle than the beginning. While that may be true, and inflation is coming down, prices still remain high and inflation sticky, and as such it’s hard to envisage a situation where the Federal Reserve would want to signal that it is starting to go soft as rates move closer to their terminal level, wherever that level may be. This would suggest that market pricing of a 25bps rate hike in February may well be optimistic and that further upside surprises in yields, as well as the US dollar, are likely to be forthcoming in the coming weeks. Against such a backdrop, and the fact that US markets have underperformed since October, there is a feeling that investors see more value in European markets than they do in US markets at the moment. This seems entirely sensible when you look at how much US markets have outperformed European markets over the last decade, with the Nasdaq 100 up over 300% compared to the DAX which has doubled in value. With interest rates anchored close to zero for most of the last 15 years, and tech largely driving the rebound in valuations we appear to be getting to the point where these valuations are now starting to come under greater scrutiny now that interest rates are normalising. We have now moved from a TINA (There Is No Alternative) world, to a world where money now has a value, and we can see now that a lot of tech stocks are being held to a higher benchmark when it comes to their growth potential. Looking at the T12 dividend yield for the Nasdaq 100, which shows a value of 0.98% is an interesting comparison when you consider the US 2-year yield is at 4.25%. Compare that to the DAX and FTSE100 which have forward dividend yields of 3.4% and 4.23% and then look at the equivalent German yield at 2.6%, and UK 2-year yield at 3.4%, and the comparison is even starker, begging the question as to why we shouldn’t see further divergence between US and European markets in the weeks ahead. Looking at US markets through this lens its entirely plausible you could see a situation where the FTSE100 and DAX continue to make new highs, while the S&P500 and Nasdaq 100 continue to look weak dropping below their October lows in the process now that there is an alternative in this higher interest rate and inflation environment.

Data from the US on Friday supported risk appetite and provided a technically significant blow to the dollar against many of its peers. The monthly report showed that the US economy created 223k new jobs in December after 256k a month earlier. The unemployment rate declined to 3.5%. The data came out better than expected but did not help the dollar. On the contrary, the markets interpreted the report as a sign of weakness rather than strength in the labour market, and it is hard to argue with such an interpretation. Wage growth slowed to 4.6% y/y against 4.8% a month earlier and peaked at 5.6% in March. This data remains an anti-inflationary factor. We also point to the decline in the working week. So strong is this fact that the index of working hours in the economy has fallen for the second month in a row, despite the growth of jobs. Companies prefer to grow in terms of staff but not wages. Possible reasons are that low-skilled people are more actively returning to the labour market. However, they had previously avoided returning to work because of covid pay and fear of contagion. Aside from the NFP publication, the ISM Non-Manufacturing Index was also released on Friday, which suddenly fell from 56.5 to 49.6 (55.0 was expected). Values below 50 indicate a contraction in activity after 30 months of consistent growth. The index was pulled down by a slump in new orders and business activity. The employment and orders indices moved into a decreasing territory, indicating a pessimistic view of the near-term economic outlook. The ISM notes that such index values indicate a GDP contraction of around 0.2% for December. The latest economic data package from the USA turned out to be a significant factor in favour of the Fed raising interest rates by 25 points at the start of February, continuing the slowdown. Furthermore, markets are still laying into the futures quotations that the Fed will reverse to a policy easing by the end of 2023 despite the bombardment from the FOMC members. The latter continues to reassure that they are ready to raise the rate above market expectations and do not intend to cut it this year. The publication of reports showing the shrinking economy and looming recession caused a bearish reversal on the dollar index. The Dollar Index lost over 2% from levels before Friday's release. But more importantly, a strong move reversed the previous bullish candlestick, taking the Dollar Index back to 103.3, the lows of December and under the 61.8% Fibonacci retracement area from the early 2021 rally. In addition, a "death cross" is forming on the daily charts above the DXY when the 50-day average slides below the 200-day average. And the price is under both lines at the same time, reinforcing the bearish signal. The following potential stopping points in the decline of the DXY are waiting at 101.50-102 (local lows of May-June) and 50% of the rally. A more distant target is 97.8-99.0.  In EURUSD, the first target for the bulls in a couple of weeks is 1.09 and up to 1.12 before the end of the first quarter.