Strong US data to give the Fed further pause for thought

The US economy is likely to experience 6%+CPI readings through 1Q 2022 and we forecast the economy to expand at a 6%+ annualized rate in the current quarter, which does raise the question – why is the Fed continuing to stimulate the economy?

There is a strong argument that it can stop immediately, but that is not the view of the Federal Reserve. However, the blowout CPI report has heightened market expectations of the Fed taking swifter action on policy normalization and we would not be surprised to see the Fed take the decision to accelerate its QE tapering path so that it concludes in Q1 rather than Q2 2022.

The October retail sales and industrial production reports are next week’s highlights and both should be strong. Retail sales will be lifted by the 6%MoM increase in new vehicle units sold – the first increase since April – while gasoline station sales will be boosted by the surge in gasoline prices. Elsewhere, rising household income and wealth should mean decent gains although we continue to expect a rebalancing trend away from the purchase of physical things that show up in retail sales, towards services, which are picked up in broader consumer spending.

Over the weekend President of the Federal Reserve Bank of Minneapolis Neel Kashkari crossed wires during the weekend, via the CBS News. The Fed policymaker conveyed his inflation outlook and terms it temporary although it causes pain.

He said “The high prices that families are paying, those are real and people are experiencing that pain right now. We need to take it very seriously, but my view is we also need to not overreact to some of these temporary factors even though the pain is real. If we overreact to a short-term price increase that can set the economy back over the long term. Over the next three, six, nine months, I think we’re going to get a lot more data on both the demand side and the supply side to get a better reading of where the economy is headed.”

FX implications

Although the early Asian session on Monday fails to react to the news, these comments from the Fed official are more or less in line with Treasury Secretary Jannet Yellen’s latest view on Inflation. The same should keep hopes of easy money on the table and favor US dollar strength.

UK jobs numbers to edge the Bank of England closer to December rate hike

Before hiking rates for the first time, the Bank of England has made it clear it wants to get more clarity on what’s going on in the jobs market now the furlough scheme has ended. Next week’s data will give us further clues, but early evidence suggests there hasn’t been a huge spike in redundancies now wage support has stopped. We are more likely to see some underemployment – perhaps early retirements or people working fewer hours than they’d like. But barring a huge negative surprise, recent comments suggest policymakers will proceed with a rate hike – and most likely at the December meeting (or at the latest February).

Inflation is only going in one direction for now, and we expect another jump next week on the recent increase in the energy price cap. We expect headline CPI to peak at around 4.5% next April.

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Though equity markets closed in the green on Friday, all four major US indices finished in the red on a weekly basis. The S&P 500 Index, the Dow Jones Industrial Average and the NASDAQ all snapped a five-week winning streak, while the Russell 2000 ended a four-week straight upward run. The tech heavy-NASDAQ 100 rose 1.04%, the index leader, while value stocks listed on the Russell 2000 lagged, eking out a 0.09% gain.

The major US indices posted bearish candlesticks for the week. The S&P 500 and the NASDAQ indices formed Hanging Men, a set-up for a bearish call, pending confirmation of a close below Friday’s closing prices.

The mega cap Dow opened the week higher, but closed well into the previous week’s candle, completing a Dark Cloud Cover, which occurs when bears dismantle a bullish attack and fight back.

It’s noteworthy that while equities had a losing week, yields wiped out most of their previous week’s losses, as investors sold-off Treasuries, including the 10-year note. It’s rare for both stocks and Treasuries to fall in unison since investors generally rotate between them, bidding up shares when looking for risk and hiding money in Treasuries when they decide to retreat into a safer haven.

However, this past week provided a rare market environment—while investors worried that increasing costs would weigh on corporate profits, speculation for faster and tighter monetary policy incentivized traders to let go of current rates, anticipating higher yields for Treasuries ahead.

Gold and Oil

Gold surged last week, +2.81%, the yellow metal’s most powerful move since early May. It was the precious metal’s seventh straight daily gain, the longest streak since a nine-day advance ended on July 29, 2020. Where gold heads next remains a bit precarious based on its technicals. On the weekly chart, the price action completed an H&S bottom, but on the daily chart, trading formed an imperfect Hanging Man—flawed due to a small upper shadow, which can mitigate the pattern’s psychology of spurned hopes when the price falls. A close below 1,860 will signal a return move to the weekly H&S bottom.

Oil posted a third weekly price drop as, among other pressures, US shale output surged to its highest level since the beginning of the pandemic. From a technical perspective, however, oil might be setting up for a rally. ONE TO WATCH!!!

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Bitcoin has been struggling on Sunday to maintain a slight gain. This is occurring as the price of the cryptocurrency is on the verge of completing a falling flag, the second consecutive bullish pattern for the token after the pennant that was completed last Monday. A long green candle will signal a resumption of the underlying uptrend.

ALT Season might be upon us with our mid-large cap alt pick being Binance coin. We see further upside here while at the same time we are currently keeping a close eye on Dogecoin, Tron, XRP and Solana. Please keep an eye on the crypto section for updates as the week progresses.