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Inflation

During high inflation focus on high pricing power equities2022 continues to prove difficult for investors around the globe. The conjunction of heightened geopolitical risks, increasingly hawkish central banks, and runaway inflation has forced many investors to change tack and modify their asset allocation significantly over the last 12 months. Duration has been lowered across asset classes, and a survey we commissioned1 recently revealed that 77% of European professional investors use equities to hedge against inflation. Fighting inflation by wielding Pricing Power Not all equity investments are equal in the face of inflation. The key differentiator is their ‘Pricing Power’. Pricing Power describes the ability of a company to increase its price without impacting demand or losing market share to competitors. In an inflationary environment, margins are under pressure because companies ‘import’ inflation, whether they want it or not. Overall costs for the companies increase through labour, supply, or energy. The only tool to mitigate the impact of inflation on margin is to increase prices. Companies with Pricing Power will be able to do so the most efficiently. Certain types of companies tend to have higher Pricing Power: Companies that deliver essential services tend to wield a lot of Pricing Power as they have somewhat captive clients. This is the case for many companies in the Consumer Staples, Healthcare, Utility, or Energy sectors. Companies that deliver high-quality products or services and possess a distinct competitive advantage can also increase prices efficiently. Luxury goods companies benefit from their clientele's relatively low price sensitivity. Some companies can benefit from favourable supply-demand dynamics at a particular point in time. This is, for example, the case of semiconductors in 2021 or energy companies this year. History is the best guide to the future As is our habit when trying to assess the future, we turn to the past for guidance. The below graph focuses on US-listed stocks since the 1960s. It assesses the average outperformance or underperformance of different groupings of stocks, since the 1960s, when inflation is higher than the last five-year average. We observe that, on average: High Quality stocks weathered inflation better than Low Quality stocks Value stocks beat Growth stocks High Dividend stocks outperformed Low Dividend stocks Small Cap and Low Volatility did better than Large Cap or High Volatility companies Overall, High Quality, High Dividend and cheap stocks appeared to fare better in high inflation environments. The same analysis on sectors shows that Value-orientated, High Dividend sectors also tend to do better against inflation. Energy, Healthcare, Consumer Non-Durables (Food, Tobacco, Textiles), and Utilities exhibit the strongest average outperformance during high inflation. It is clear here that the quantitative data aligns with our qualitative assessment. The factors and sectors that historically outperformed when inflation was high are those that have the greatest chance to harbour high Pricing Power companies. This should give investors indications on how they could tilt their portfolio to fight inflation. Quality and Dividend Growth to fight inflation In light of the unique challenges equity investors face, High Quality companies focusing on Dividend Growth could help strengthen portfolios. High Quality companies exhibit an 'all-weather' behaviour that tends to deliver a balance between building wealth over the long term whilst protecting the portfolio during economic downturns. Dividend-paying, highly profitable companies tend to: Exhibit higher pricing power allowing them to defend their margins by passing cost inflation to their customer. Exhibit lower implied duration, protecting them in a rate-tightening environment, thanks to a focus on short-term cash flows. Provide a defensive tilt and an enhanced capacity to weather uncertainty.
NASDAQ:NQFFUSQ
by aneekaguptaWTE
Endgame for central banks far from doneThis week the UK economy posted its highest inflation reading in 41 years rising 11.1% year on year (yoy) in October. The recent jump is largely the result of the uprating of the household energy price cap in October. Core inflation moved sideways at 6.5% yoy. We expect this to represent the peak for UK inflation. As the base effects of high energy prices begin to factor in, headline inflation in the UK is likely to fall. At the same time, the ongoing recession is likely to strip away the underlying price pressures. This has been evident in lacklustre consumer demand alongside waning housing market activity. UK Government claws back its credibility with the Autumn Statement Meanwhile the UK Government’s fiscal statement released this week1, confirmed significant fiscal austerity with spending cuts and widening of the tax base amounting to around 2% of Gross Domestic Product (GDP) after five years, although its mainly backloaded. The energy price guarantee will now have its cap for average household dual tariff annual bill lifted from £2500 to £3000 from April 2023 and remain in place for a further 12 moths. This is less generous than the original plan to cap bills at £2500 for two years. The Office for Budget Responsibility’s (OBR) analysis suggests that the measures announced in the Autumn statement reduce the depth and length of the recession this year and next but leave the economy on a similar growth trajectory over the medium term. We expect real GDP to contract by 1.3% next year followed by growth of 2% in 2024. With this is mind, we expect the Bank of England (BOE) to pause its tightening cycle once rates get to 3.5% in December followed by 50Bps of cuts in H2 2023. Eurozone to endure a short recession Owing to the external supply shock, Eurozone has faced a similar inflation narrative as the UK. In October Eurozone inflation reached 10.6% yoy. We expect inflation to remain high in the next few months, however starting early next year, the annual rates should decline aided by the base effects from the surge in energy prices in 2022. Owing to which we expect European Central Bank to continue to tighten monetary policy until Q1 2023. On the positive side, while Eurozone will endure a recession in Q4 2022 and Q1 2023, we expect the recession to be less deep than previously expected owing to the less dire gas situation. This was evident in the November ZEW survey, which showed expectations gauge for the economy in the six months ahead improve significantly to -38.7 in November from -59.2 in October. This remains in line with our view that in six months’ time the Eurozone economy should be on its way out of a recession. Federal Reserve (Fed) speakers singing from the same hymn book Fed officials backed expectations they will moderate interest-rate increases to 50 basis points next month, while stressing the need to keep hiking into 2023. St. Louis Fed President James Bullard said policy makers should increase interest rates to at least 5% to 5.25% to curb inflation. He also warned of further financial stress ahead. Bullard’s comments came a day after San Francisco Fed President Mary Daly said a pause in rate hikes was “off the table.” Fed Governor Waller (one of the more hawkish Fed officials) emphasized that while rate hikes will likely slow to 50bp in December, the ultimate destination or “cruising altitude” will depend on labour market and inflation data. Waller echoed Atlanta Fed President Bostic’s concerns about labour costs pushing up service sector prices which in our view remains the key upside risk to inflation even as core goods prices have slowed. Fears are mounting that relentless rates increases will hit economic growth, with a critical segment of the Treasury yield curve at the most steeply inverted in four decades, historically such an inversion has tied in with a US recession. Maintaining a value bias within equities Amidst the challenging backdrop for global equities, we have observed the value factor outperforming the growth factor by 17.3%2 in 2022. Across global markets, European equities are trading at the deepest discount (32%) from price to earnings (p/e) ratio to their 15-year average owing to fears of the energy crisis being detrimental to the economy. The recent 3Q 2022 earnings season provided evidence that European earnings have remained stubbornly resilient despite the broader macro turmoil. A deeper dive into the sector level suggest that energy, transport, utilities and healthcare have seen some of the biggest increases to their Earnings Per Share (EPS) estimates in 2022. The WisdomTree Europe Equity Income Index outperformed the MSCI Europe Index in 2022. The performance attribution highlighted below illustrates that the higher exposure to value sectors such as materials, financials, healthcare, industrials, and energy contributed to the outperformance.
FRED:T5YIE
by aneekaguptaWTE
1
USD/CAD rises as retail sales slipThe Canadian dollar is in positive territory on Tuesday. In the North American session, USD/CAD is trading at 1.3400, down 0.39%. The Canadian consumer was not in a spending mood in September, as retail sales declined by 0.5%, following a 0.4% gain a month earlier. The forecast stood at -0.4%. Core retail sales fell by 0.7%, worse than the consensus of -0.4% and the prior reading of 0.5%. Despite the weak data, the Canadian dollar has managed to post gains today, thanks to a broad US dollar pullback. The drop in retail sales will put a damper on expectations of a 50-basis point hike at the December meeting, as the Bank of Canada will likely deliver a modest 25-bp hike. Inflation, the bank's number one priority, remains very high at 6.9%, as the BoC's aggressive rate-hike cycle is yet to show results. The benchmark rate is currently at 3.75%, and like the Federal Reserve, there's more life remaining in the current rate-tightening cycle. The BoC is closely monitoring employment and retail sales data, as strong numbers will make it easier for the bank to continue hiking as policy makers look for that elusive peak in inflation. The recent US inflation report triggered a wave of exuberance, sending equity markets higher and the US dollar on a nasty slide. Investors became more confident that Fed was close to a pivot in its aggressive policy and risk sentiment soared. The Fed has pushed back hard, with Fed members delivering hawkish statements and projections, which has chilled risk appetite and stabilized the US dollar. Fed member Mary Daly weighed in on Monday, stating that inflation remained unacceptably high and projecting that the fed funds rate will peak at 4.75%-5.00%. USD/CAD tested resistance at 1.3455 earlier in the day. Next, there is resistance at 1.3523 There is support at 1.3341 and 1.3218
by OANDA
Ok, here comes the Fed Pivot, what's next?With all the chatter on the Fed Pivot, we think it’s worth exploring, what happens after a Fed Pivot or Fed Pause. Let’s break down the discussion into two camps, a Fed Pause, defined as a pause in policy rate hikes, and a Fed Pivot, loosely defined as reversal of policy rates aka rate cuts. To keep things in context, we will look at the effect of the Fed’s Pause/ Pivots on Major Indices, the Dollar and Inflation rates. First let’s review where we are at now. The recent release of the October CPI numbers has spurred 3 notable things: 1) It knocked the dollars off its unprecedented rally since the start of the year. 2) It has given a little more credibility to the slight downward shift in inflation, with 2 consecutive lower readings. 3) It marked a local low in major equities indices Naturally, the question is, have we bottomed? Or is this a slight breather on the elevator down… To answer this question, we look at 2 similar periods in the past, where the fed pauses, then cut rates after. These past examples could be useful in providing some clues as to where markets might be headed next. Dot Com Period in 2000 Between June 1999 and May 2000, rates were raised before taking a 7-month pause, following which rate cuts ensued in Jan 2001. During this period, equities turned lower, with the DJI falling another 30% while the S&P & Nasdaq another 40% before finding the bottom. The bottom was only in when the dollar clearly broke its uptrend, inflation peaked & turned lower and after rounds of rate cuts. In fact, and somewhat eerily, the dollar broke close to the 108 level, almost exactly where the dollar broke its current uptrend. The Great Inflation of the 1970s In the 1970s episode, rate hikes were paused from Aug 1973 to Feb 1974 before a cut in 1974. Untamed inflation forced the fed into another hiking cycle from March 1974 before the final onslaught of cuts from July 1974 onwards. This rate pause was then followed by another over 30% decline in equities. Again, we find that the bottom was only in after Inflation peaked and the Dollar clearly broke its uptrend, while the Fed cut rates. If this framework of using the Dollar, Peak Inflation & Rate levels holds, a keen observer might note the similarities with what we are looking at now. So, if the current dollar break holds and Inflation truly peaks, then the Fed Pivot will be the last piece of the puzzle to mark the bottom. So, when will the Fed Pivot you might ask? Using the CME FedWatch Tool, we see the market implied probability of a fed pause starting in May 2023, followed by a pivot in September 2023. In our view, this is still quite far away and if historical precedence holds, there are still ways to go before we are close to call the bottom. Additionally, market timing and expectation of a rate pause and cut have continually been re-priced higher and further over the past year. We will not be surprised if the timing and level of pause and cut get repriced unfavorably again after the FOMC minutes release this week. From a price action perspective, the S&P seems to be near the upper band of the channel in which it has been trading since the downtrend started. This could once again prove to be an area of resistance, which could present an attractive short compared with the other 2 indices. The average of the past 3 declines from the upper to lower band range, took roughly 54 days and 700 points. Taking that as a benchmark, we set our stops at 4150 index points, close to the previous levels of resistance, and a profit target at 3500 index points, close to the average of the past declines and lower band of the channel. Each Index point is 50$ on the CME E-Mini S&P500 Futures contract and $5 on the CME Micro E-Mini S&P500 Futures. We will watch with keen eyes if the Dollar breakdown holds and listen for any change in the Fed’s timeline. If history is any guide, we remain bearish on equities, given the uncanny level of dollar index, inflation peak and Fed's policy path as we see now. The charts above were generated using CME’s Real-Time data available on TradingView. Inspirante Trading Solutions is subscribed to both TradingView Premium and CME Real-time Market Data which allows us to identify trading set-ups in real-time and express our market opinions. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com Disclaimer: The contents in this Idea are intended for information purpose only and do not constitute investment recommendation or advice. Nor are they used to promote any specific products or services. They serve as an integral part of a case study to demonstrate fundamental concepts in risk management under given market scenarios. A full version of the disclaimer is available in our profile description. Sources: www.forbes.com www.thebalancemoney.com
TVC:SPXShort
by inspirante
34
US Inflation Rate, YoY, Double Top? - Long-term ViewPresently, the inflation rate in the US has started falling, which increases expectations for a pivot - end of interest rate hikes. And factually, we can actually expect it. The supply of M2 Money Stock (M2SL) and its annual growth rate are decreasing. The global economy is shifting, as leading economic index (LEI) indicate. This will undoubtedly put pressure on the Federal Reserve to cut interest rates. However, after the current crisis, the economic recovery will cause a recurrence of inflation. So, if that is the case, the next decade will be marked by tight monetary policy and high inflation. This situation will let the central banks introduce a new monetary system based on CBDCs using incentives such as cheaper credit. Check also my related ideas. Enjoy
ECONOMICS:USIRYY
by MichaelFX_ICT
US interest rate, and exchange rate of Japan Yen and Korean WonThe trend of Japanese Yen and Korean Won within most of year 2022, as can be observed when reading together with the chart of USinterest rate, show how closely linked their relationship are. Recently government of relevant countries have been attempting to change this situation by putting money into the foreign currency exchange market, but as long as interest rate of each of those countries aren't increasing accordingly, and US interest rate still keeping up, no change in this trend is expected.
by PhakeNick
2
OIL & INFLATION peaked, expect bearish Dollar long termWeekly chart, pointing out Oil's peaks since 2000. Oil is displayed in black, Inflation in red and the U.S. Dollar in green. Excluding the one this year, Oil has had another three major market peaks, during all of which inflation followed suit and fell along. The USD tends to lag in these instances but after a multi month period of volatility, it also falls significantly. In our opinion this is the start of a long term ranged trade on the DXY where investors can buy low on the support that will be soon formed and sell the rebounds near the yearly resistance. ## If you like our free content follow our profile to get more daily ideas. ## ## Comments and likes are greatly appreciated. ## ## Also DONATIONS through TradingView coins help our cause of increasing the daily ideas put here for free and reach out more traders like you. ##
TVC:DXY
by InvestingScope
Year end Trade Inflation peak / Long YTD losers Short Winners- USD has probably peaked for 2022 post US CPI important release. - Into year end Trade - Contrarian Play is to Buy Losers (Coppers, NDX, US Equities, Gold), Sell Inflation winners (WTI, USD, Financial sector, Energy Equities). - In Commodities I chose WTI as a good proxy Technicals Long term Trend is negative on crude since the top in June 2022, we broke decisively on 50-week MA and trading under Systematic / CTA Positioning is still Long. Into year end with only 5 weeks left, it's highly likely that the Trend Trade will be unwound, based on very large Standard deviations moves that happened yesterday in macro Space (US10Y, USD, Crude, Equities)
MATBAROFEX:WTI1!Short
by ArisopeCapital
US dollar index holds key support ahead of US inflation reportThe US dollar was falling ahead of the midterm elections in anticipation of a Republican Senate and / or House. As the Dems have performed better than expected, we have seen a reversal of these pre-emptive moves on the eve of the US inflation report. Expectations are for core CPI to soften (slightly) - but what if it doesn't? Inflation elsewhere continues to surprise to the upside, and with the dollar holding above key support then the path of least resistance could be higher, unless Reps take 'da house' and Senate ad inflation comes in softer than expected. DXY held above the 109.60 support zone and produced a 2-bar bullish reversal. A bullish divergence has also formed with the RSI (2). Bulls could seek to enter long on retracements within yesterday's candle and place a stop beneath the cycle lows and target the monthly pivot point. But I'd also be looking for evidence of a swing high up to ~112 - but for now the near-term bias remains bullish.
TVC:DXYLong
by CityIndex
Can the US dollar index (DXY) pick itself back up?What a difference a week (or in this case, a single CPI report) can make. Last week we were bullish on the dollar index due to the cluster of support levels nearby, and expectations for inflation to exceed estimates. Clearly, the fundamentals of a much softer CPI report made minced meat of the support zone and sent the dollar index lower, during its worst week since the pandemic. Yet there are signs that momentum is waning and DXY may be due a bounce. It should also be remembered that the Fed are nowhere near this famous 'pivot', and that the Fed will continue to hike rates whilst the economy can withstand it. And retail sales suggest the consumers think they can withstand higher rates, at least for now. DXY daily chart: The US dollar may be approaching a swing low and ticks a few boxes for a potential inflection point. Downside momentum has slowed, a bullish hammer formed on Tuesday and a small inside bar occurred yesterday. Furthermore, it is holding comfortably above the August low and a bullish divergence has formed on the RSI (2). For now, it is a case of seeing whether it can hold above yesterday's low (105.32) and reverse higher, or whether it has one more attempt at testing the August low. Given the magnitude of its losses, mean reversion (higher) seems more likely over the near-term, with potential targets including the weekly pivot point ~108, or the 109.50 area should US data remain firm and Fed members remain hawkish.
TVC:DXYLong
by CityIndex
S&P 500 Will Likely Take Out $4300 This Month-Feds will likely go forward with a 50 bps in December, eyes are on Dec 13 CPI data release. -US Inflation is down for November and I'm expecting it to continue falling during next month's CPI release. If that's the case, then I believe Feds will reduce by 25 bps. -The US dollar, which has a major influence on stocks, appears to be forming a monthly correction in near term. This could also drive stocks indexes to higher levels in the next couple of quarters. -Looking at monthly price action, traders are pricing in a potential bullish impulse towards $4300 then $4500 by the end of Q4 as they await the Dec 13-14 data release.
ULong
by Liquified-Trader
2
Gold Is Bearishly Back Testing The Weekly Moving AveragesRight now we can clearly see that Gold has Double topped at the PCZ of a Multi-Year-Alternate-Bat Pattern and also formed a small Deep Gartley at the PCZ of the Alt-Bat which ended up forming a Clear Double Top at the 1.13 Extension. Now after a Notable Decline Gold has retraced back to the Moving Averages which happen to align with what we would see as the Double Top Neckline and the 88.6% Fibonacci Retracement. If price can hold below these Averages we will likely see it make a move back towards the lows between $1,377 and $1,000
COMEX_MINI:QO1!Short
by RizeSenpai
UK 11% inflation and supply chain shock is starting to fadeUK inflation goes to 11% a 41-year high, goods prices continue to increase. BOE says supply chain shock is starting to fade, however, with this inflation rate, the next couple hours the EURGBP will certainly go long. Chart: We have a support that was not tested after the dates of UK. But we can see the RSI in a oversold zone and after changing the direction the MACD is going up. The MA of BB has already been tested with some candles shadows, but none of them crossed it.
Long
by AFCapital21
2
Pound rises even as inflation tops 11%The British pound has moved higher on Wednesday. In the European session, GBP/USD is trading at 1.1934, up 0.56%. The pound roared on Tuesday, gaining close to 1% and punching past the 1.20 line for the first time in three months. It has been a busy time for sterling, which has been marked by sharp swings that would make an exotic currency blush. The pound's volatility has been especially pronounced in the month of November. The US dollar has hit a rocky patch and the pound has taken full advantage, climbing 3.5% this month. UK inflation continues to rise and hit a staggering 11.1% in October, a 41-year high. The upward trend continued despite the government introducing an energy price guarantee. Inflation jumped from 10.1% in September and ahead of the consensus of 10.7%. Core CPI remained unchanged at 6.5%, but was higher than the forecast of 6.4%. The Bank of England hasn't been able to stem rising inflation despite tightening policy but will be hoping that its jumbo 0.75% hike earlier in November will take a bite out of the next inflation report. The UK economy is facing a double-whammy of high inflation and a recession, and all eyes will be on Finance Minister Jeremy Hunt, who will announce the government budget on Thursday. Hunt will aim to restore the government's credibility and stability, after the recent political soap opera which resulted in three different prime ministers in a matter of months and significant financial instability. The UK employment report on Tuesday was lukewarm, with unemployment ticking higher to 3.5%, up from 3.4%. The Bank of England will be concerned about the increase in wage growth, which will create even more inflation. Wages excluding bonuses rose to 5.7%, up from 5.5% and ahead of the consensus of 5.6%. The BoE will be under pressure to continue hiking aggressively, even though this will hurt the struggling UK economy. GBP/USD has pushed above resistance at 1.1878. The next resistance is 1.2030 1.1767 and 1.1660  are providing support
by OANDA
1
Alleged Russian strike on Poland stirs marketEUR/USD 🔼 GBP/USD 🔼 AUD/USD 🔼 USD/CAD 🔽 USD/JPY 🔽 XAU 🔼 WTI 🔼 Two people have been killed in a missile strike near the eastern Polish border. The possible Russian attack on a NATO member has raised speculation that the Russian invasion of Ukraine will escalate. As a safe haven asset, spot gold rose to $1,778.8 an ounce, while WTI oil futures moved up slightly to $87.01 a barrel. On the other hand, US PPI readings were lower than expected, sparking hopes that the Federal Reserve will slow down rate hikes upon reducing producer price growth. The dollar was weakened against its peers. EUR/USD increased to 1.0348, and AUD/USD added over 60 pips to 0.6756. GBP/USD climbed to a high of over two months at 1.1994 and closed at 1.1858, as Mitrade anticipated UK annual inflation data this afternoon would reach 10.7%. Once again, USD/JPY sank below the 140.0 level to 139.29, and USD/CAD declined to 1.3277. Major US stock indices also enjoyed minor upticks. A gain of 56 points (+0.17%) was made on the Dow Jones Industrial Average, 34 points (+0.87%) on the S&P 500, and 170 points (+1.45%) on the Nasdaq 100.
by Mitrade_official
1
Japanese yen rises despite GDP declineThe Japanese yen hit its highest level since August 29th, as the currency powers higher. In the North American session, USD/JPY is trading at 139.17, down 0.53%. The US dollar can't find its footing, and even a soft GDP reading out of Japan hasn't put a dent in the current yen rally. The economy declined in the third quarter for the first time in a year. GDP fell by 1.2% YoY, much weaker than the consensus of a 1.1% gain and the 4.6% gain in Q2. The usual suspects were the drivers of the decline in GDP - weak global growth and rising inflation. In addition, the weak yen, which recently fell to 32-year lows, has contributed to higher prices. The yen has reversed its fortunes since the unexpectedly soft US inflation report and has soared 6.4% in November. The investor exuberance which sent the stock markets flying last week appears to have subsided. Investors jumped on the soft inflation report, as risk sentiment soared and the US dollar retreated. Fed members have responded by sending a hawkish message to the markets, as any dovish signals could complicate its battle to bring down inflation. Fed Vice Chair Brainard said on Monday that she was in favor of slowing the pace of rate hikes, but that further hikes were still required in order to bring down inflation. Brainard's stance was echoed by Fed member Waller who said that while the Fed may ease up on the size of future rate hikes, it should not be seen as a "softening" in its fight against inflation. Waller added that the 7.7% inflation reading in October was "enormous", in sharp contrast to the markets, which chose to focus on the fact that inflation fell sharply from 8.2% in September. The Fed is committed to curbing inflation and is far from convinced that inflation has peaked, even though inflation appears to be trending in a downward direction. USD/JPY is testing support at 1.39.66. Below, there is support at 138.69 There is resistance at 140.88 and 141.61
by OANDA
GBPUSD LongCable is pushing higher as the DXY continues to correct. GBPAUD and EURUSD are also a buy, suggesting that the EUR and GBP are benefiting from a weaker dollar. There is a slight gap left from the opening price compared to last weeks close, so we have the opportunity to fill that. Assuming the same thing happens as last week, we'll carry on higher. But that is the place on the chart to watch for a reversal. The US CPI last week set the re-pricing of assets and there are still around 30 days before the FOMC decide on their next move.
Long
by Macrobriefing
1
USDJPY: What to expect for the upcoming days?Hello there! So after the Q3, and the decisions that has been taken by the BOJ concerning the interest rate, in addition to the 0.4% rise in the CPI. As well as the decrease in the DXY during the last month -4.79% and in the last 5 days a decrease that resulted -3.13%. Those factors alone can picture the path of the USDJPY. Going now into the technical part, too many indicators said the way now is bearish, but let's take things more friendly and talk about the structure. Now in lower time-frames, we can see that there was an order block that indicated that the currency will go bull to reach approx. (141.600 - 141.800). But it seemed that it reached something of 140.800, and went bear. So what we could exepect after this small hike? Well, according to some indications and order blocks, taking into consideration the supp. and res. areas, the currency could reach (133.300). But, following the news and the decisions that could be taken will be the ones who decide if the USDJPY will rally down more, or go for a reversal. But in the mean time, nothing indicates at all a reversal based on decisions from the federal reserve or the BOJ, as well as the technical analysis.
Short
by JawadShoukeir
Market Impacts: from Midterms to Second HalfCME: Micro E-Mini Nasdaq 100 ( CME_MINI:MNQ1! ) On August 17th, I published “Market Impacts of US Midterms Elections”. Thanks to your support, it made it to “Editors’ Picks” and was featured in TV Digest newsletter in an email themed “Midterms are Coming” to all subscribers. With the midterm elections coming to an end, it’s a good time to reassess the situation, exploring potential changes in economic policies which may give rise to trading opportunities. In the August 17th story, we have discussed 3 potential outcomes of the midterm election: • Party Government: The President, the House and the Senate are controlled by the same political party • Divided Government: Only one chamber of Congress aligns with the President • Opposing Government: The President and the Congress are from different political parties Before the elections, the Democratic Party controls the White House and both chambers of the Congress. It was clearly a “Party Government” under our definition. As of this writing, Democrats clinched 50 seats in the Senate. With the tiebreaking vote from Vice President Harris, Democrats retain Senate majority. Meanwhile, Republicans lead 212:204 in the House race but has not reached the magic 218 required to flip controls. GOP represent half of the voters in this election. They hold on to at least 49 seats in the Senate, gain more seats in the House, and are likely to retake control. They also have governorship in half of the 50 States. So, why the Midterms are being perceived as a landslide victory for Democrats? It’s all about expectations. Historically, midterms are bad for the ruling party. Whichever party in the White House usually loses seats in the Congress. In the 2018 midterms, Nancy Pelosi led the Democrats to recapture the House of Representatives. With Biden’s approval rate hovering at 40% low, and inflation rate flying high, GOP was widely expected to have a stunning victory at both chambers of the Congress. To the Democrats, the absence of “Red Waves” is a vindication of their political agenda. While a “Divided Government” is still possible pending final results, Biden and Senate Majority Leader Chuck Schumer already claimed election victory. Conclusion: the emboldened Democrats will go full speed with “Build Back Better” in the second half of President Biden’s presidency. Bigger Spending In the last two years, the Biden Administration passed legislations with budget over $4 trillion. These include: • American Rescue Act in March 2021, $1.9 trillion • Infrastructure Investment and Jobs Act in November 2021, $1.2 trillion • U.S. Chip and Science Act in August 2022, $280 billion • Inflation Reduction Act in August 2022, $757 billion Also in August 2022, the Administration announced a Student Loan Forgiveness Plan that is expected to cost $400 billion. The plan is currently on hold by court orders. In the First Half, new budget items averaged $2 trillion a year. I expect more big budget items to come in the Second Half. If Republicans are not there to slow down the legislative ambitions, it’s hard to tell how big the spendings will be. Bigger Deficit and Bigger Debt According to USDebtClock.org, the 2022 Federal Tax Revenue is estimated at $4.92 trillion, and the Federal Spending Budget will be $5.98 trillion. The shortfall is Federal Budget Deficit, at $1.06 trillion. The largest federal budget items are: • Medicare/Medicaid, $1.490 trillion, (24.9%) • Social Security, $1.231 trillion, (20.6%) • Defense/War, $770 billion, (12.9%) • Interest on Debt, $481 billion, (8.0%) I notice that debt interest has risen by $39 billion from previous estimate, and its share in the federal budget grows from 7.4% to 8.0%, thanks to the Fed rate hikes. US National Debt is estimated at $31.3 trillion. Budget deficit needs to be financed by debt. Therefore, national debt would rise to $32.5 trillion next year at a minimum. While many bonds were issued before 2022 and carried low yields, new Treasury bonds must pay current market rates. Considering Fed Funds already at 4%, I put 3% down as my estimate for weighted-average federal debt service rate in 2023. This would price the annual debt interest at $975 billion, which is 103% higher than this year, and $205 billion more than the Defense budget! With Democrats in control, I expect Medicare, Medicaid, and Social Security to get favorable budget allocation next year. Heightened geopolitical tensions in multiple fronts justify a bigger Defense budget. Assuming all of them goes up by 5% and there is no change in other budget items, my baseline forecast for 2023 federal budget is $6.65 trillion, an 11% annual increase. Assuming tax revenue goes up by 10%, we will have a budget deficit of 1.23 trillion, a 24% jump from 2022. Big spending legislations could add $1 trillion more on top of this. Sticky High Inflation The US economy is caught between restrictive monetary policies and expansive fiscal policies. When trillions of dollars are flooding the economy and the financial system, prices of goods and services tend to go up. Raising interest rates alone is not sufficient to bring the price level down. This is why inflation is still uncomfortably high after six consecutive rate hikes. Cathy Wood recently flowed an idea claiming inflation could turn negative next year, citing similarity from the Roaming Twenties. I peg to differ. The Federal Government is pumping $6-7 trillion in a $26 trillion economy. Every year, federal agencies and contractors get bigger budget, government employment grows, and federal employees get higher wages. Regardless of the business cycle, one quarter of the US economy is expanding. Industries benefiting from government spending will strive, even if the country may slip into a recession. Higher Taxes Big spending comes with bigger taxes. Government needs more tax revenue to pay for its ambitious agenda. • Higher tax rate on people earning $400,000 or more. New taxes on investment carry interest, translating into headwinds for hedge fund, private equity, and venture capital. • The 15% minimum corporate tax will affect multinational corporations which frequently use offshore tax haven. Potential Winner Unlike political elections, it is tricky to find a clear winner in the financial market. Comparing the performance of major US stock market indexes, the Dow has a year-to-date return of -7.18% as of November 11th, while S&P 500 and Russell 2000 yield -15% and -14.14%, respectively. Nasdaq 100 falls 25.10% and is the worst performer. Big Tech is laden with bad news these days, with missed earnings and widespread layoffs among them. As stock prices are beaten down, valuations become more reasonable. In my opinion, advanced technologies that align with government priorities would benefit in the next two years. Clean energy, artificial intelligence, biotechnology, space technology and electric vehicles are on the receiving end of major government funding. While I was bearish with the Nasdaq at 13,500, I think it could find price support at 10,500. However, impacts from the Midterms interact with business fundamentals, the ever-changing investor sentiments, and major global events. The next Fed meeting is only two weeks away. Let’s wait for the next rate decision, as it is the overarching factor that guides market direction right now. We can put CME Micro E-Mini Nasdaq 100 Futures ( CME_MINI:MNQ1! ) on the watch list today. MNQ has a notional value of $2 times the index. At 11,792, each contract is valued at $23,584. Opening a Long or Short position requires initial margin of $1,500. While the S&P 500 is trending down, certain sectors may outperform the broad market. CME recently launched E-mini S&P Biotechnology Select Industry Futures ( CME:SXT1! ) and E-mini PHLX Semiconductor Sector Futures ( CME:SOX1! ). They each offer more precise trading opportunities tailored to industries benefiting from increased government funding. Happy Trading. Disclaimers *Trade ideas cited above are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management under the market scenarios being discussed. They shall not be construed as investment recommendations or advice. Nor are they used to promote any specific products, or services. CME Real-time Market Data help identify trade set-ups and express my market views. If you have futures in your trading portfolio, check out on CME Group data plans in TradingView that suit your trading needs www.tradingview.com
CME_MINI:MNQ1!Long
by JimHuangChicago
5
US100 14400 is a bullish targetThe Inverse Head & Shoulders has completed. There will be loads of stops under the right shoulder and the head. But for now, we have to assume that the pattern is going to play out. In my other research, I detail why fundamentally the Nasdaq should go higher but you would have to dig around and find it on the internet because I am not allowed to tell you where it may be. The reason I put it on a different platform is that I can't upload the charts of my research here! The nut of the thesis is that there is still a lot of money flowing into the markets from the US government. Targets for a (i)H&S is x2 the distance from the head to the neckline, projected in the direction of the breakout. Just be on the lookout for a fundamental reason why the algos reverse the price action and attack those stops under the RHS and Head
U
by Macrobriefing
2