Do you remember we were predicting a recession, that was supposed to hit the US and the global economy at the start of the year?
A recession that would hit equities and boost bonds?
Well, forget about all that, it’s not happening. And if you look at the data, what’s happening is the exact opposite.
The US jobs data remains strong, inflation continues coming lower but the downtrend gives signs of slowing. And yesterday’s US retail sales data came as a cherry on top, with an eye-popping 3% rise in retail sales last month; it was the biggest jump in the past two years.
The data could be impacted by seasonality, yes, but people spent more in every single category: car purchases soared and housing got a boost on softer mortgage rates over the past couple of months. The only category which was less promising was energy; gasoline sales were flat.
But the part of sales that impacts the GDP calculation – which anyway excludes gasoline, auto, building materials, rose 1.7%.
On the production side, the news is almost as good. Industrial production was unchanged, but it’s mostly because the warm weather caused a 10% drop in utilities. But besides that, manufacturing output increased 1% and mining output rose 2%.
These numbers are clearly not the type of numbers you would expect to see for an economy that’s marching into a recession.
All this is great news, but it’s clearly not what we expected to see.
Equities up, bonds down
Equities gapped lower at the open, but the strength of the economic data got the bulls buying. The S&P500 ended the session 0.28% higher, while Nasdaq 100 stocks added almost 0.80%.
Treasury yields pushed higher however on expectation that the Federal Reserve (Fed) will continue its rate hike policy – and quite aggressively, given that the rate hikes don’t seem to do any harm to the economy.
The US 2-year yield hit 4.70% after the data yesterday, the 10-year advanced past 3.80%.
Deutsche Bank revised its terminal Fed rate from 5.1% to 5.6%. Citi believes that the Fed will end up pushing the rates all the way up to 6%.
Today, the US will reveal the latest producer price inflation data. Producer prices are expected to have ticked higher by 0.4% m-o-m in January, versus a 0.4% retreat printed last month. On a yearly basis, the PPI index is expected to have slowed from 6.2% to 5.4%.
Normally, I would expect a positive PPI surprise – meaning stronger inflation figures – to impact the market mood negatively, but at this point, I am not even sure that it matters.
FX and commo
The US dollar bears gave in to the bullish pressure yesterday, and the resistance near the 50-DMA in the dollar index was finally cleared.
The EURUSD fell to 1.0660 and is struggling around the 1.07 level this morning, with prospect of a further fall as the unexpectedly strong economic data gives that unexpected strength to the greenback. The key support stands at 1.0475, around the major 38.2% Fibonacci retracement which distinguishes the latest positive trend, from a bearish reversal.
The rebound in the dollar-yen gains momentum. The pair traded above the 134 mark yesterday, and the strong US data – which reinforce the Fed hawks’ hands, and no big news from the new BoJ Governor Ueda regarding the bank’s unadopted dovish policy keep pushing the pair higher. Japan announced its largest ever trade deficit today, which is also not supportive news for the yen. Here the key resistance stands at 136.50/137 range, that includes the major 38.2% retracement on the latest selloff and the 200-DMA.
Technically, both for the EURUSD and the dollar-yen, as long as these levels are not breached, there is no change in the trend. But if the US data continues surprising to the upside, there is no guarantee that the dollar will not jump into a bullish trend, yet again.
In precious metals, the positive pressure in the US yields and the stronger dollar continue weighing on gold. The price of an ounce hit $1830 yesterday. $1814 is the key Fibonacci support that should distinguish between the actual positive trend, and a medium-term bearish reversal.
In energy, the barrel of American crude fell to the 50-DMA, as the EIA data revealed an eye-watering 16-mio barrel build in US crude inventories last week. Well, the EIA also insisted yesterday that global oil consumption will climb by 2 mio barrels this year thanks to Chinese reopening. That and the slowing recession odds should normally support the oil bulls, but the 100-DMA, which stands near $81pb, seems difficult to clear from today’s perspective.
As a result, if the major US indices were up yesterday, energy stocks didn’t benefit from a broad-based rally. Devon Energy was one of the worst performers of the S&P500 yesterday with a more than 10% slump in the session, while Occidental Petroleum slid more than 5%.