MONDAY 11 TO 15 SEPTEMBER 2023

(Excerpts from Briefing.com, tradingeconomics.com, marketwatch.com, CNBC )

Mega-Caps Still Rule The Waves

The Dow Jones Industrial Average eked out a slim gain this week while the S&P 500 and Nasdaq saw modest declines. The beginning of the week was quiet in terms of market-moving events and somewhat light on participation. The second half of the week featured plenty of market-moving events, capped off with a quarterly options and futures expiration day on Friday. Downside moves had the S&P 500 and Nasdaq close below their 50-day moving averages.

The major indices had been on track for a winning weak until Friday’s retreat. Despite a lower finish at the index level, eight of the 11 S&P 500 sectors closed with a gain. Information technology, which is the most heavily weighted sector, declined 2.2%. 

Apple (AAPL) was a top laggard from the info tech sector, dropping 1.8% this week amid reports of ongoing scrutiny in China and following its product event that featured the introduction of the iPhone 15. Adobe (ADBE) was another weak component, dropping 5.6% following its underwhelming fiscal Q4 guidance.

Weak semiconductor constituents also contributed to the sector’s underperformance. That weakness followed Arm’s (ARM) successful IPO on Thursday and a Reuters report that Taiwan Semiconductor Manufacturing Co. (TSM) is delaying chip equipment shipments. The PHLX Semiconductor Index fell 2.5%. 

Netflix (NFLX), which is among the top performers this year, tumbled 10.4% this week after its disclosure that the ad business is not material yet to its overall revenue. 

The collective weight of large cap losses weighed heavily on index performance. The Vanguard Mega Growth ETF (MGK) declined 0.8% while the market-cap weighted S&P 500 fell 0.2%. Meanwhile, the Invesco S&P 500 Equal Weight ETF (RSP) fell by a modest 0.1%.

There were some other corporate news items that drove selling activity, including Spirit Airlines (SAVE), Frontier Group (ULCC), Delta Air Lines (DAL), and American Airlines (AAL) all warning about their Q3 outlooks partially due to rising fuel costs.

Additionally, the United Auto Workers launched targeted strikes at three manufacturing plants (one for each of the Big Three) after being unable to reach a deal on a new contract with the automakers. Ford (F), Stellantis (STLA), and General Motors (GM) still closed with gains of 2.5%, 5.6%, and 3.0%, respectively, this week.

Market participants also digested a slate of economic releases. Chief among them was the August Consumer Price Index report. Total CPI was up a robust 0.6%, as expected, and core-CPI, which excludes food and energy, was up 0.3% (consensus 0.2%). That left total CPI up 3.7% year-over-year, versus 3.2% in July, and core CPI up 4.3% year-over-year, versus 4.7% in July.

The key takeaway from the report is that core inflation, which is what the Fed monitors more closely, showed ongoing improvement on a year-over-year basis; however, it is still well above the Fed’s 2.0% target, reflecting a sticky quality that probably won’t compel the Fed to raise rates further at this point, but which will certainly keep the Fed in a “higher for longer” mindset.

Treasuries handled this week’s inflation data reasonably well, which was supportive of stocks. Yields drifted higher, but moves weren’t panicky.  The 2-yr note yield rose four basis points this week to 5.02%. The 10-yr note yield rose seven basis points this week to 4.33%.

Rising oil prices remained top of mind this week. WTI crude oil futures jumped 4.2% to $91.00/bbl.

As a reminder, the Fed meets next week with a policy decision announcement at 2:00 p.m. ET on Wednesday. Market participants are not expecting a rate hike and will be more focused on the updated Summary of Economic Projections and the tone that Fed Chair Powell takes at his press conference. 

Below are truncated summaries of daily action:

Monday:

The major indices started the week with gains, albeit on light volume at the NYSE. The S&P 500 and Nasdaq closed near their best levels of the day, which had both indices above their 50-day moving averages. Strength from some mega cap names provided a nice boost to the broader market.

The Nasdaq climbed 1.1% and the market-cap weighted S&P 500 rose 0.7% while the Invesco S&P 500 Equal Weight ETF (RSP) eked out a 0.2% gain. Tesla (TSLA) was a notable outperformer, jumping 10% after being upgraded to Overweight from Equal Weight at Morgan Stanley.

Market breadth was positive, but modestly so. Advancers led decliners by an 11-to-10 margin at the NYSE and the Nasdaq.

The lack of strong conviction on either side of the tape comes ahead of a busy week of economic data. This week’s calendar features the August Consumer Price Index on Wednesday, followed by the August Producer Price Index and Retail Sales report on Thursday.

There was no U.S. economic data of note on Monday.

Tuesday:

Tuesday’s session started with a positive bias under the surface despite a mixed performance at the index level. The S&P 500 and Nasdaq were in negative territory early on, albeit with somewhat modest losses. That weakness had them both below their 50-day moving averages. At the same time, the Dow Jones Industrial Average and Russell 2000 were trading up and market breadth was positive.

The early underperformance seen in the S&P 500 and Nasdaq was largely driven by softness in the mega cap space and a big decline in Oracle (ORCL) following its earnings report and relatively disappointing guidance.

A mid-day push higher saw the S&P 500 briefly climb past its 50-day moving average, but it was unable to maintain that posture, which invited increased selling activity in the afternoon trade. The major indices spent most of the afternoon in a steady decline. The Dow Jones Industrial Average finished with a fractional loss while the S&P 500 and Nasdaq Composite closed near their worst levels of the day.

Apple (AAPL) was weak in front of its closely-watched product event and pulled back following a slate of announcements that featured the introduction of the iPhone 15.

Rising oil prices, which hit their highest level since last November, were another overhang for the market.

Tuesday’s economic data was limited to the August NFIB Small Business Optimism index, which declined to 91.3 from 91.9.

Wednesday:

Wednesday’s trade was lackluster with the major indices registering only modest gains or losses. The A-D line favored decliners, but there wasn’t a lot of conviction overall. The major indices followed the direction of the mega cap stocks, which drove some choppy action in the morning and later in the afternoon.

The key takeaway from Wednesday morning’s CPI report is that core inflation, which is what the Fed monitors more closely, showed ongoing improvement on a year-over-year basis; however, it is still well above the Fed’s 2.0% target, reflecting a sticky quality that probably won’t compel the Fed to raise rates further at this point, but which will certainly keep the Fed in a “higher for longer” mindset.

The Treasury market saw some knee-jerk selling in response to the data. Things quickly calmed down, though, which was supportive for the stock market. The 2-yr note yield jumped to 5.07% after the data, but finished at 4.99%, one basis point lower from Tuesday’s settlement. The 10-yr note yield, which hit 4.34% following the data, fell two basis points from Tuesday to 4.25%.

Airline stocks were a notable weak spot in the market after Spirit Airlines (SAVE), Frontier Group (ULCC), and American Airlines (AAL) warned about their Q3 outlooks due in part to rising fuel costs. The U.S. Global Jets ETF (JETS) fell 2.7%.

Reviewing Wednesday’s economic data:

• Total CPI increased 0.6% month-over-month in August, as expected, with rising gasoline prices accounting for over half of the increase. Core CPI, which excludes food and energy, rose a stronger-than-expected 0.3% month-over-month (consensus 0.2%). On a year-over-year basis, total CPI was up 3.7%, versus 3.2% in July, and core CPI was up 4.3%, versus 4.7% in July.
  • The key takeaway from the report is that core inflation, which is what the Fed monitors more closely, showed ongoing improvement on a year-over-year basis; however, it is still well above the Fed’s 2.0% target, reflecting a sticky quality that probably won’t compel the Fed to raise rates further at this point, but which will certainly keep the Fed in a “higher for longer” mindset.
• The weekly MBA Mortgage Index was down 0.8% after decreasing 2.9% a week ago. The Refinance Index was down 5.4% while the Purchase Index was up 1.3%.
• The August Treasury Budget showed a surprising surplus of $89.2 billion compared to a deficit of $219.6 bln in the same period a year ago. The surplus in August resulted from receipts ($283.1 billion) exceeding outlays ($193.9 billion). The Treasury Budget data is not seasonally adjusted so the August 2023 surplus cannot be compared to the July 2023 deficit of $220.8 billion.
  • The key takeaway from the report is that outlays included impacts from the $319 billion Debt Relief Reversal downward modification to the DOE’s Federal Direct Student Loans program. August typically shows a budget deficit (68 times out of 69 fiscal years) since there are no major tax due dates.
• Weekly crude oil inventories increased by 3.954 mln barrels after decreasing by 6.307 mln barrels a week ago.

Thursday:

Stocks had a strong showing on Thursday after a quiet start to the week in terms of market-moving events. The major indices all closed near their best levels of the session with decent gains. The S&P 500, which closed above 4,500, and the Nasdaq Composite climbed past their 50-day moving averages.

Thursday’s positive bias was driven by a couple of factors. There was a speculative buzz in the air surrounding the Arm Holdings (ARM) IPO, which opened for trading at $56.10. There was also some central bank news and economic data that comported with a more hopeful economic outlook.

Specifically:

• The ECB raised its three, key interest rates by another 25 basis points, but hinted that it might be done raising rates, thereby opening the door to claims that today’s move was a “dovish hike.”
• The PBOC said the required reserve ratio will be cut by 25 basis points, effective September 15, for all banks that don’t currently have a 5% reserve ratio.
• August retail sales (+0.6%) were stronger than expected.
• The August PPI report produced an in-line core reading and some palatable year-over-year increases of 1.6% for total PPI and 2.2% for core-PPI, respectively.
• Initial jobless claims for the week ending September 9 were just 220,000, which is a level associated with a tight labor market that is supportive of continued consumer spending.

The relatively calm response to the data from Treasuries was another factor supporting stocks.

Reviewing Thursday’s economic data:

• Weekly Initial Claims 220K (consensus 226K); Prior was revised to 217K from 216K; Weekly Continuing Claims 1.688 mln; Prior was revised to 1.684 mln from 1.679 mln
• The key takeaway from the report is the same: the low level of initial claims – a leading indicator – is reflective of a fairly tight labor market, which is the basis for why consumer spending continues to hold up in the face of inflation pressures and rising rates.
• August PPI 0.7% (consensus 0.4%); Prior 0.3%; August Core PPI 0.2% (consensus 0.2%); Prior was revised to 0.4% from 0.3%
  • The key takeaway from the report is that 80% of the rise in final demand prices was attributed to a 2.0% jump in the index for final demand goods, which was driven by a 10.5% increase in prices fir final demand energy. That understanding softens the blow of the headline surprise for the index for final demand; however, until energy prices back down, concerns about rising inflation expectations and the Fed holding higher for longer will persist.
• August Retail Sales 0.6% (consensus 0.2%); Prior was revised to 0.5% from 0.7%; August Retail Sales ex-auto 0.6% (consensus 0.4%); Prior was revised to 0.7% from 1.0%
  • The key takeaway from the report is that gasoline station sales (+5.2%) had a big impact on the overall increase in retail sales. Excluding gasoline stations, retail sales were up a more modest 0.2%, which is suggestive of a consumer that is softening but not breaking.
• July Business Inventories 0.0% (consensus 0.1%); Prior was revised to -0.1% from 0.0%

Friday:

The stock market registered sizable declines on this quarterly options and futures expiration day. The S&P 500, Nasdaq, and Russell 2000 gave back all their gains for the week while the Dow Jones Industrial Average narrowed its weekly gain to a modest 0.2%. The major indices all closed near their worst levels of the session, which had the S&P 500 and Nasdaq below their 50-day moving averages.

Many stocks participated in downside moves, but mega caps and growth stocks had an outsized influence on index performance.

Weak semiconductor stocks also weighed heavily on index performance. That weakness followed Arm’s (ARM) successful IPO yesterday and a Reuters report that Taiwan Semiconductor Manufacturing Co. (TSM) is delaying chip equipment shipments.

Rising market rates and oil prices contributed to the negative bias.

Adobe (ADBE) was a top laggard after it underwhelmed with its fiscal Q4 guidance.

Notably, General Motors (GM) and Stellantis (STLA) registered gains despite failing to reach a deal with the UAW, which resulted in targeted strikes at three manufacturing plants (one for each of the automakers). Ford (F) for its part logged a small decline.

Reviewing Friday’s economic data:

• August Import Prices 0.5%; Prior was revised to 0.1% from 0.4%
• August Import Prices ex-oil -0.1%; Prior was revised to -0.1% from 0.0%
• August Export Prices 1.3%; Prior was revised to 0.5% from 0.7%
• August Export Prices ex-ag. 1.7%; Prior 0.6%
• September Empire State Manufacturing 1.9 (consensus -10.0); Prior -19.0
• August Industrial Production 0.4% (consensus 0.2%); Prior was revised to 0.7% from 1.0%; August Capacity Utilisation 79.7% (consensus 79.3%); Prior was revised to 79.5% from 79.3%
  • The key takeaway from the report is that motor vehicle assemblies were weak in front of what is now a UAW strike, so the outlook for industrial production in September will be constrained by an expected disruption to auto manufacturing capabilities as a result of the strike.
• September Univ. of Michigan Consumer Sentiment – Prelim 67.7 (consensus 69.4); Prior 69.5
  • The key takeaway from the report is that consumers’ inflation expectations came down. That is something the Fed will like to see, but one is left to wonder if those expectations will remain in check if gas prices continue to increase.

• Dow Jones Industrial Average: +0.1%for the week / +4.4% YTD
• S&P 500: -0.2% for the week / +15.9% YTD
• Nasdaq Composite: -0.4% for the week / +31.0% YTD
• Russell 2000: -0.2% for the week / +54.91% YTD

Fading Away

U.S. Treasuries closed the week on a modestly lower note, holding to tight trading ranges for most of today’s session and not responding to news of the UAW starting strike actions against the Big Three automakers. Weakness in stocks today didn’t help Treasuries much either nor did the understanding that consumers’ year-ahead and 5-year ahead inflation expectations came down in September. A continued rise in oil prices acted as an offset of sorts along with some trepidation in front of next week’s FOMC meeting and publication of an updated Summary of Economic Projections.

Bond Yields after the close on Friday 15 September:

• 3-mth: +1 bp at 5.56% (+1 bp for the week)
• 2-yr: +2 bps to 5.02% (+4 bps for the week)
• 5-yr: +3 bps to 4.45% (+6 bps for the week)
• 10-yr: +4 bps to 4.33% (+7 bps for the week)
• 30-yr: +3 bps 4.23% (+9 bps for the week)

The yield curve rose in a pivot against the short-term maturity yields in Week 37, flattening key inverted spreads in the process.

10-YEAR/2-YEAR

The inverted 2-year/10-year yield spread narrowed to -69 bps from -72 bps the previous week on Friday 08 September 2023.

• The current inversion of the 2/10 which began on Tuesday 5 July 2022 is now three-hundred and three sessions old, making it the longest period of inversion in more than 45 years.
• The current inverted 2y/10y spread at -107 bps, printed on Wednesday 08 March 2023, surpassed the previous widest spread printed on Tuesday 07 March 2023 at -103 bps. 
• One needs to go back all the way to October 1981 to see a steeper inversion than the current one.

The inversion of the 2/10 spread has heralded economic recessions/slow-downs, six months to a year ahead of almost every historical recession. 

10-YEAR/3-MONTH

The inverted 3-month/10-year yield spread narrowed to -123 bps from -129 bps the previous week.

• The inverted 3m/10y spread that began on 25 October, is now two hundred and twenty-four sessions old, making it the longest inversion more than 45 years.
• -189 bps printed on Thursday 01 June and Thursday 04 May is the widest inverted spread on the 3m/10y, surpassing the -188 bps printed on Wednesday 01 June and Wednesday 03 May 2023.
• -189 bps surpasses all the previous inverted 3m/10y spreads over the past 50+ years.

Historically, when the 3-month maturity yields more than the 10-year maturity with a minimum holding period of 10 straight days, a recession followed 6 to 18 months later with most of those recessions being Hard Landings.

10-YEAR/FED FUNDS RATE

The inverted 10-year/Federal Funds Rate spread narrowed to -104 bps on Thursday 14 September from -107 bps the previous Friday 08 September, 2023.

• The current 10y/FFR inversion which began on Tuesday 15 November 2022 is two hundred and eight sessions old.
• The -171 bps spread on Thursday 04 May 2023 surpasses the -153 bps spread printed on Wednesday 05 and Thursday 06 April 2023 as the widest of the current inversion in over 22 years.
• The current inversion has surpassed the previous two inversions;
  • May 2019 to March 2020
  • July 2006 to January 2008
• One needs to go back to 02 January 2001 for a deeper inversion when the 10-year/FFR was at -175 bps.
• By my estimation, the inverted 10y/FFR spread would have narrowed to -100 bps on Friday 15 September 2023.

Since 1970, whenever the 10-year maturity yield fell below (inverted) against the Federal Funds Rate, a recession followed about a year later accompanied by a downturn in the financial markets. Over recent years, the holding period to qualify this inversion has varied widely, ranging between a couple of weeks to three quarters.

Dollar Hovers at 6-Month Highs

The US Dollar Index held above 105 on Friday, hovering at its highest levels in six months as robust US economic data raised hopes that the Federal Reserve could engineer a soft landing even if it keeps interest rates higher for longer. US retail sales advanced 0.6% MoM in August, beating forecasts for a 0.2% gain while producer prices increased 0.7%, the most since June 2022 and exceeding market expectations for a 0.4% rise. Traders are still betting that the Fed would hold rates steady next week, while the central bank’s next policy move in November remains up for debate. The dollar also gained against the euro after the European Central Bank delivered what many analysts believe is the last hike in its current tightening cycle. Meanwhile, the greenback weakened versus the yuan after China posted stronger-than-expected economic numbers for August.

• EUR/USD: Lower by -0.4% to 1.0657 from 1.0698 the previous week, +6.4% YoY
• GBP/USD: Lower by -0.7% to 1.2383 from 1.2464 the previous week, +8.5% YoY
• USD/JPY: Higher by +0.0% to 147.83 from 147.81 the previous week, +3.4% YoY
• USD/CNY: Lower by -1.1% to 7.3640 from 7.3640 the previous week, +4.0% YoY
• USD/SGD: Lower by -0.2% to 1.3625 from 1.3650 the previous week, -3.1% YoY

Japanese Yen Weakens as BOJ Outlook Mulled

The Japanese Yen weakened again past 147 per dollar, sliding back toward ten-month lows as investors reassessed the outlook for Bank of Japan monetary policy in light of Governor Kazuo Ueda’s recent remarks. Ueda said over the weekend that the central bank could end its negative interest rate policy when the 2% inflation target is sustainability achieved. However, analysts argued that his statement was conditional and did not commit to policy normalization. The yen has weakened sharply this year amid a widening interest rate differential with the US, as the Federal Reserve embarked on an aggressive tightening campaign while the BOJ remained committed to dovish policy. Meanwhile, latest data showed that producer prices in Japan rose the least in 29 months and decelerated for the eighth straight month in August.

Euro Falls after ECB Decision

The Euro dropped to $1.066, the lowest in six months, as the European Central Bank raised interest rates for the 10th consecutive time and indicated that it would pause its monetary tightening. ECB policymakers said that the current borrowing costs have reached a point where, if maintained for a sufficient duration, they would significantly contribute to bringing inflation back to the target level. However, inflation is still projected to remain high for an extended period, even though it’s on a downward trajectory. According to the ECB’s economic projections, average inflation in the Euro Area is forecasted to be 5.6% (vs 5.4% in the June projection) in 2023, 3.2% (vs 3.0%) in 2024, and 2.1% (vs 2.2%) in 2025. Meanwhile, stronger-than-expected data from the United States further bolstered the argument for an extended period of elevated interest rates in the country.

Commodity prices rebounded in Week 37 with Corn and Soy losing out while Energy, Metals and Wheat all made gains. 

The broad-based Bloomberg Commodity Index closed higher at 107.47, up +1.3% from 106.08 in Week 36, 2023. Year-to-date, the index is down -4.7%.

Wednesday 31 May 2023’s close at 97.96 is the lowest close since Thursday 25 May 2023’s close at 99.29, setting a new 52 week low close. It is also the lowest close since 31 December 2021 at 99.17.

Wednesday 31 May 2023 saw the index print a 52-week intraday low at 97.69 at 10.00am ET, surpassing the previous 52-week intraday low on Thursday 25 May at 98.79.

The index touched an intraday high of 138.16 on Wednesday 08 June 2022 and printed its highest close this year on Thursday 09 June 2022 at 136.61, +1.20% higher than its previous high close on 18 April 2022 at 134.99. 

Crude Approaches 52-Week High

Crude oil pushed to its highest since November last year, driven by expectations of a tightening global oil market. The International Energy Agency reported ongoing supply cuts by major producers like Saudi Arabia and Russia, leading to a significant market deficit in the fourth quarter. OPEC also predicted a substantial 3.3 million barrel per day deficit, while the US Energy Information Administration had a more conservative estimate of a 230,000-barrel deficit. However, US crude inventories unexpectedly rose by 4 million barrels last week, defying expectations of a 1.9 million-barrel decline. Meanwhile, the ECB likely conducted its final interest rate hike, while strong economic data in the US pointed towards prolonged high-interest rates.

WTI crude futures rose to settle at $90.77 per barrel to book a 4.6% weekly gain while Brent futures settled at $93.93 per barrel, up 4.2% for the week.

The settlement price spread between WTI and Brent increased by +$0.02 to $3.16 from $3.14 the previous week on Friday 08 September 2023.

Baker Hughes total total U.S. rig count +9 at 641 (Prior: +1).

• WTI settled higher at $90.77/barrel from $87.51 the previous week (+13.3% YTD)
• Brent settled higher at $93.93/barrel from $90.65 the previous week (+9.6% YTD)
• Nat Gas settled higher at $2.64/MMBtu from $2.61 the previous week (-35.2% YTD)

Gold Goes Up on Push from China

Gold rose to settle above $1,950 an ounce on Friday, buoyed by promising Chinese economic data and weaker dollar. China’s industrial output and retails sales growth came in better-than-expected, signaling the positive impact from government measures and lifting the demand outlook for bullion. Still, the increase was limited, as investors continued to fret about interest rate prospects. Earlier, robust US economic data bolstered bets that the Federal Reserve will keep its monetary policy restrictive for some time. On the other hand, the European Central Bank seems to have implemented its last 25 basis point rate hike in the current tightening cycle. Elsewhere, the People’s Bank of China cut the reserve requirement ratio by 25 basis points for all banks effective September 15 to keep ample liquidity and support a nascent economic recovery. Weekly, the metal was to end little changed.

Copper Rebound Holds Out

Copper futures rose above this week to settle at $3.79 per pound, extending the rebound from the three-week low of $3.68 touched on September 8th supported by momentary softness in the US dollar and hopes of improved demand for industrial inputs in China. The PBoC cut its reserve requirement ratio for the second time this year, aligning with eased rules to acquire property in key construction hubs and micro-targeted financial support at the financial scale, set to ramp up demand for industrial activity. The results had already pinned some improvements in the country’s deteriorating macroeconomic backdrop, with August PMIs pointing to some slight expansion, consumer prices rebounding from July’s deflation, and credit growth accelerating more than expected. In the meantime, further increases were limited by a sharp rise in Chinese copper inventories, with stocks at the Shanghai Futures Exchange rising by over 8,000 tonnes in the first week of September.

Corn Futures Settle Near 3-Year Low

Corn futures in the US fell below $4.8 per bushel to settle at $4.76 per bushel, its lowest settlement in almost three years after a government report indicated that the corn crops were not as negatively impacted by hot and dry weather during the summer as traders had anticipated. The US Department of Agriculture (USDA) raised its outlook for the corn harvest, primarily due to the extensive acreage planted, which offset the damage to yield projections caused by extended periods of dry conditions. The USDA’s monthly World Agricultural Supply and Demand Estimates (WASDE) report showed that while this year’s US corn yield is below the trend, it is still expected to be the fifth highest on record, thanks to a record number of ears per acre and abundant ear counts. USDA projected corn production at 15.134 billion bushels (above expectations of 15.008 billion bushels), with average yields seen at 173.8 bushels per acre (more than the forecast of 173.5 bushels per acre).

• Corn settled lower at $4.76/bushel, from $4.84 the previous week (-30.0% YTD)
• Wheat settled higher at $6.04/bushel, from $5.96 the previous week (-23.6% YTD)
• Soyabeans settled lower at $13.38/bushel, from $13.63 the previous week (-12.2% YTD)

Cocoa Remains Close to 45-Year Peak

Cocoa futures were trading around $3,740 a tonne, remaining close to the near 45-year high of $3,874 reached on September 13th due to supply tightness. A global deficit is widely forecast for both the current 2022/23 season and the 2023/24 season, which begins on October 1st. Ivory Coast’s output is expected to total about 1.8 million metric tons in 2023/24, down from an average of about 2.25 million tons annually in recent years, mainly due to poor weather conditions. Meanwhile, cocoa output from the world’s second-biggest producer, Ghana, for the 2022/2023 season is expected to be lower by around 11% than a target of 750,000 tonnes due to smuggling and illegal gold mining on farmlands. For the 2023/24 season, which started on September 8th, Ghana’s cocoa regulator expects output to reach 800,000 tonnes. Elsewhere, news of an invasive virus being found in Brazil added to concerns.

Palm Oil Rises for 3rd Day But Prints Weekly Loss

Malaysian palm oil futures settled the week below MYR 3,800 per tonne, having enjoyed some upside momentum for the third consecutive session, supported by gains in rival vegetable oils. Meantime, top palm oil buyer India purchased 1.13 million tonnes of palm oil in August, a 3.9% rise from July to a 9-month high. In China, economic activity strengthened last month, with growth in retail sales and industrial output beating consensus. Meantime, Indonesia set its crude palm oil reference price at $798.83 per ton for the Sept. 16-30 period, which put the export tax and levy unchanged at $33 per ton and $85 per ton, each. On cargo data, exports of Malaysian palm oil products for Sept. 1-10 fell 11.2% mom, surveyor Intertek Testing Services said. Meanwhile, independent inspector AmSpec Agri Malaysia estimated a 20.4% drop. For the week, however, the contract is heading for the 2nd straight fall, rattled by data showing Malaysia’s palm oil inventory rose to a 7-month high at the end of August.

Baltic Exchange Dry Index Rises For 8th Session

The Baltic Exchange’s dry bulk sea freight index, which measures the cost of shipping goods worldwide, was up for the eighth day on Friday, rising 3.1% to its highest since May 19 at 1,2381 points, amid stronger demand across all vessel segments. The capesize index, which tracks vessels typically transporting 150,000-tonne cargoes such as iron ore and coal, advanced for the 8th straight session, jumping 6% to a one-month peak of 1,602 points; and the panamax index, which tracks ships that usually carry coal or grain cargoes of about 60,000 to 70,000 tonnes, edged up 14 points to 1,656 points. Among smaller vessels, the supramax index added 25 points, or 2.1% to 1,221 points. The Baltic index climbed 16.4% for the week, the most since March, boosted by higher rates for capesize (24.3%) and panamax (11.2%) vessel segments.

• • • • •

Asian Stocks Gain on Wall St, China Boost

Asian equity markets climbed on Friday, tracking Wall Street higher as investors shrugged off a hotter-than-expected US producer inflation report and cheered Arm Holdings’ successful IPO. Sentiment was also lifted after China cut reserve requirements for all banks to boost the country’s economic recovery and reported upbeat retail sales and industrial production numbers for August. Shares in Australia, Japan, South Korea, Hong Kong and mainland China all advanced.

The Japanese stock markets jumped 1.1% to close at 33,533 while the broader Topix Index climbed 0.95% to 2,428 on Friday, extending gains from the previous session and taking cues from a strong lead on Wall Street, as investors shrugged off a hotter-than-expected US producer inflation report and cheered Arm Holdings’ successful IPO. Both benchmark indexes also gained nearly 3% for the week. Arm Holdings, a chip design firm 90% controlled by SoftBank, soared nearly 25% on its market debut and signaled a potential end to a prolonged technology IPO drought. All sectors advanced on Friday, with strong gains from index heavyweights such as SoftBank Group (2.1%), Tokyo Electron (3.1%), Toyota Motor (2.7%), Sony Group (2.3%) and Inpex Corp (1.6%).

The Hang Seng climbed 134.97 points or 0.75% to close at 18,182.90 on Friday, gaining for the second day, as traders welcomed official data showing China’s industrial output and retail sales picked up pace in August with stronger-than-expected growth. Meantime, the PBoC kept the interest rate on its 1-year medium-term lending facility unchanged and added further cash into markets via a key policy loan for the 10th month, after announcing a further reduction in lenders’ RRR Thursday. A rise in US futures also supported sentiment, with investors shifting their attention to the Fed’s rates meeting next week. All sectors contributed to the upturn, amid wins from Wuxi Biologics (5.3%), Sunny Optical Tech. (3.6%), H World Group (3.2%), and CSPC Pharmaceutical (2.4%). The index pared its early gains, however, down by 0.11% weekly, amid more evidence that property woes in China are far from over as Sino-Ocean, a major state-backed developer, suspended repayments on its offshore borrowings.

The Shanghai Composite fell 0.28% to close at 3,118 while the Shenzhen Component dropped 0.52% to 10,145 on Friday, reversing gains from earlier in the session even after China reported better-than-expected retail sales and industrial production numbers for August. The People’s Bank of China also cut the reserve requirement ratio by 25 basis points for all banks effective September 15 to keep ample liquidity and support a nascent economic recovery. Analysts remain doubtful on whether these stimulus measures will be able to turn the country’s faltering economy around, keeping investors on edge.

The S&P/ASX 200 Index jumped 1.29% to close at 7,279 on Friday, extending gains from the previous session and taking cues from a strong lead on Wall Street, as investors shrugged off a hotter-than-expected US producer inflation report and cheered Arm Holdings’ successful IPO. The benchmark index also gained nearly 2% for the week. Moreover, domestic shares got a boost after China cut reserve requirements for all banks and reported upbeat retail sales and industrial production numbers for August, boosting the economic outlook for Australia’s largest trading partner. Mining and energy stocks led the charge on firmer commodity prices, with gains from BHP Group (3.7%), Rio Tinto (3.4%), Fortescue Metals (4.3%), Woodside Energy (1.3%) and Whitehaven Coal (4.6%). Nearly all other sectors also advanced, including financial, consumer-related and technology stocks.

Singapore stocks rise on optimism
over China’s recovery; STI up 1%

The Straits Times Index (STI) gained 1 per cent or 31.18 points to 3,280.69 on Friday (Sep 15) amid a lifting of sentiment across regional markets as Chinese economic data beat expectations. For the week, the STI ended up 2.3 per cent. Across the broader market, gainers beat losers 351 to 227 after 1.8 billion securities worth S$1.7 billion changed hands.

Bursa rebounds as positive China
economic data lifts sentiment

•  
• Japan’s Nikkei: +1.1% (+2.8% for the week) +28.5% YTD
• Hong Kong’s Hang Seng: +0.8% (-0.1% for the week) -8.1% YTD
• China’s Shanghai Composite: +0.1% (+0.0% for the week) +0.9% YTD
• India’s Sensex: +0.5% (+1.9% for the week) +11.5% YTD
• South Korea’s Kospi: +1.1% (+2.1% for the week) +16.3% YTD
• Australia’s ASX All Ordinaries: +1.4% (+1.7% for the week) +3.6% YTD
• Malaysia’s FKLCI: +0.7% (+0.3% for the week) -2.4% YTD
• Singapore’s STI: +1.0% (+2.3% for the week) +0.9% YTD

European Stocks End Week Higher

European equity markets rose in the second week of September, with Frankfurt’s DAX 40 climbing 1%, and the pan-European STOXX 600 gaining about 1.6%, as prospects of the European Central Bank nearing the end of its monetary tightening cycle further boosted risk sentiment. 

On Thursday, the central bank delivered its 10th consecutive rate hike, a 25 basis point increase, but also conveyed its intention to potentially halt further policy tightening as inflation began to show signs of receding. Furthermore, investors embraced robust Chinese economic data that exceeded expectations, highlighting substantial growth in both industrial activity and retail sales. In the corporate arena, shares of H&M plunged by over 7% after the fashion conglomerate reported quarterly sales that remained stagnant, falling short of anticipated figures.

FTSE 100 Books Strongest Week in 10 Months

Equities in London held early gains and closed 0.6% higher at a three-month high of 7,720 on Friday, notching its biggest weekly gain in ten months (3.3%) amid strong support from miners and other companies with exposure to China. A fresh batch of data showed that the Chinese economy initially reacted positively to a series of economic support measures from Beijing, easing concerns of macroeconomic headwinds and financial contagion to lift Burberry shares by 2.5% and Prudential stocks by 1.6%. The improved outlook for Chinese infrastructure building and industrial activity also furthered the rally for miners, with Endeavour and Fresnillo soaring nearly 3%, while Anglo American added 2.3%. Next week, the BoE is broadly expected to deliver another 25bps rate hike.

• U.K.’s FTSE 100: +0.5% (+3.1% week-to-date) +3.5% YTD
• Germany’s DAX: +0.6% (+1.0% week-to-date) +14.2% YTD
• France’s CAC 40: +1.0% (+1.9% week-to-date) +14.0% YTD
• Italy’s FTSE MIB: +0.1% (+2.4% week-to-date) +21.9% YTD
• Spain’s IBEX 35: +0.0% (+2.0% week-to-date) +16.1% YTD
• STOXX Europe 600: +0.2% (+1.6% week-to-date) +8.7% YTD

• • • • •

Friday 15 September 2023, AMC

From last weekend’s WMO;

“… using weekly candles, all three benchmarks are wearing the Bearish Harami formation that implies that the coming week could consolidate with a hint of bearishness while the RUT wears a Short Dusk Line implying more downside for the mid-to-small caps.“

That consolidation-downside prediction on weekly candles worked like a charm! The benchmark indices stay below their respective 50DSMAs while RUT barely manages to stay above its 200DSMA after having closed below that key indicator on Wednesday.

“DJIA barely avoided falling below its PhiB-Fan and COP level (PhiB 61.8%) in the last three sessions. However, the DJIA and SPX are on potential Third Candle Reversals for Monday. While the DJIA battles to keep its head above the water, SPX will have a different challenge in the form of its 50DSMA as a resistance.“

Those same levels will haunt and taunt the indices in Week 38. And since we’re in love with weekly candlestick analysis for now, the SPX and COMP completed Weeks 35, 36 and 37 to form a Three Inside Down pattern, implying more downside in the coming week. DJIA followed up its Bearish Harami with a Bearish Inverted Crucifix Doji that reliably indicates downside and a break-below-and-out of its PhiB-Fan and current PhiB COP (61.8%) level.

All things being equal, as it was last week, the analysis should pan out nicely. But, with the FOMC Monetary Policy Decision due on Wednesday, I won’t be betting my house on it … maybe the kitchen sink but definitely not the house.

Sector & Industry ETFs Summary

Week 37 finished to the downside on the benchmark indices with no sector spared on Friday. However, from a sectorial perspective, things weren’t as bearish over the span of the week. The defensive sectors held up well while the overbought Homebuilders and Technology sectors capitulated.

• Technology, Discretionary and Homebuilders remain the best gainers YTD for a twenty-fifth straight week.
• Technology is still by far the stand-out winner YTD.
• Utilities was the best weekly gainer followed by Discretionary and Financials.
• Homebuilders is the worst loser for a second straight week, followed by Technology.
• Utilities remains the worst loser YTD for a seventh week while Staples and Health Care stay a distant second and third worst YTD losers.

Shiller PE Ratio

The Shiller PE Ratio, as of Friday 15 September, is at 30.59, -0.2% lower than 30.64 the previous week, below double of its mean (17.05) and its median (15.94). At this level, the ratio is just below the middle between the historical high (44.19) and the mean or the median.

The U.S. market printed its second highest Shiller PE Ratio in its history at 40.00 in October 2021. The largest bubble remains as December 1999 at 44.19.

15 September 2023 AMC

Last weekend;

“The bears seem to have come early this year and the shortened Week 36’s broader market internals were predominantly bearish regardless of the indices’ closing number.”

Thursday’s brief reprieve got cut down in a hurry to end the week lower for a second straight week. The numbers are still mostly with the bears although it must be said that the bulls are getting a slight peek into the game as of the past week’s $UVOL on NASDAQ.

“… The bears still have a firm grip on the broader market internals.“

Just when the bulls make an attempt, the bears over-run them again. The coming week is going to be a blood bath if the bulls don’t pick up their game in the year’s most bearish week.

Last weekend;

“… average volumes in August fell and now in September are still falling. The weaker the volumes get, the more vulnerable the market becomes to irrational volatility, which in most cases, have a bearish tone in September.“

Volumes seem to have found a bottom, Expiration Friday notwithstanding, and it couldn’t have come at a worst  time for the bulls … the next two weeks are the years most bearish on record.

The CBOE Volatility Index (VIX), often referred to as Wall Street’s “fear gauge,” closed Week 37 at 13.79, -0.4% lower than the previous week’s close at 13.84.

• The VIX printed its 52-week intraday high on 28 September 2022 at 34.88.
• The highest close in the past 12 months is 11 October 2022 at 33.63.
• The lowest close in the past one year is currently 12.91, printed on 22 June 2023.
• The 52 week (intraday) low is 12.73 also from 22 June 2023.

Put/Call Ratios

Any reading above 1.00 is regarded as bearish. As a common practice amongst the professionals, it is worth noting that the big money indicators are reliably the Index and ETF Put/Call Ratios while the Equity Put/Call Ratios are mostly novice/amateur participation;

• Total Put/Call Ratio fell to 0.94 from 1.05 the previous week.
• Index Put/Call Ratios closed lower at 1.04 from 1.29 the previous week.
• ETF Put/Call Ratios dipped to 1.08 from 1.21 from a week ago.
• Equity Put/Call Ratios declined to 0.70 from 0.75 the previous week.
• The CBOE VIX Put/Call Ratio rose to 0.43 from 0.32 last week.

(Note: The VIX generally measures the options activity of the 500 S&P500 issues).

• • • • •

For Week 38, the financial landscape will be heavily influenced by the Federal Reserve’s interest rate decision on Wednesday. Additionally, in the United States, all eyes will be on the release of S&P Global PMI figures, as well as several housing indicators, including housing starts, building permits, existing home sales, and the NAHB housing market index. Furthermore, central banks in the United Kingdom, Japan, China, Turkey, Norway, Sweden, Thailand, Switzerland, Brazil, Indonesia, the Philippines, and South Africa will be deliberating on their monetary policy direction. Investors will also closely monitor inflation rates in the UK, Canada, Japan, and South Africa, along with flash services and manufacturing PMI data for France, Germany, the UK, the Euro Area, Japan, and Australia.

Benchmark Indices ($DJIA, SPX AND COMP 21-year average)

• Week 38 (18 to 22 September) starts very bullish but immediately becomes bearish and ends very bearish.
• The third week of September is the month’s most bearish week.
• The week after September Triple Witching Week (Week 38) has been down on DJIA 24 of the last 32 (last year down).
• Monday 18 September is the year’s third most bullish session .
• Wednesday 20 September – FOMC Monetary Policy Decision at 2:00pm ET
• Friday 22 September is the fifth-most bearish session of the year.

Benchmark Index ETFs (DIA, SPY 19-Year Average & QQQ 13-Year Average):

• Week 38 (18 to 22 September) is more bearish than bullish with an upswing on Tuesday.

Week 38 Key U.S. Economic Notes:

• Monday 18 September – NAHB Housing Market Index, Net Long-Term TIC Flows
• Tuesday 19 September – Building Permits, Housing Starts
• Wednesday 20 September – MBA Mortgage Applications Index, EIA Crude Oil Inventories, FOMC Rate Decision
• Thursday 21 September – Initial Claims, Continuing Claims, Current Account Balance, Philadelphia Fed Index, Existing Home Sales, Leading Indicators, Natural Gas Inventories
• Friday 22 September – Nothing of note.

U.S. Economic Releases for Week 38

The US Federal Reserve is set to convene its monetary policy meeting next Wednesday, and market forecasts suggest that interest rates will remain unchanged at the current level of 5.25%-5.5%, the highest they’ve been since 2001. Investors are also eagerly anticipating the release of the latest FOMC projections, which will provide insight into the potential impact of this unprecedented policy tightening on inflation and the labor market.

Shifting our focus to economic data, the preliminary estimate of the S&P Global PMI survey is expected to indicate further deterioration in the US manufacturing sector in September, alongside modest growth in the service sector activity. Additionally, it will be noteworthy to keep an eye on a series of housing-related indicators, including building permits, housing starts, existing home sales, and the NAHB housing market index. Lastly, the second-quarter current account figures, overall capital flows, and the Philadelphia Fed Manufacturing Index will also be released during the week.

Monday 18 September

• September NAHB Housing Market Index
• July Net Long-Term TIC Flows

Tuesday 19 September

• August Housing Starts
• Building Permits

Wednesday 20 September

• MBA Mortgage Applications Index
• EIA Crude Oil Inventories
• FOMC Monetary Policy Decision at 2:00pm ET

Thursday 21 September

• Weekly Initial Claims
• Continuing Jobless Claims
• September Philadelphia Fed Index
• Q2 Current Account Balance
• August Existing Home Sales
• August Leading Indicators
• EIA Natural Gas Inventories

Friday 22 September

• S&P Global US Manufacturing PMI – Prelim
• S&P Global US Services PMI – Prelim

International Economic Releases for Week 38

In the United Kingdom, the Bank of England is anticipated to implement its 15th consecutive interest rate increase, raising the Bank rate by 25 basis points to 5.5%, the highest since 2008. Just a day before the Bank of England’s rate decision, inflation figures for August are expected to show that consumer prices surged by 7.1%, significantly exceeding the Bank of England’s 2.0% target. Another report is set to indicate a rebound in retail sales for August. However, flash PMI figures are likely to signal a second consecutive monthly decline in private sector output.

In Europe, flash PMIs for the Eurozone, Germany, and France are expected to show a further decrease in both the manufacturing and services sectors activity in September. Additionally, producer prices in Germany are anticipated to increase for the second time in eleven months. Other data to follow include the Euro Area’s final inflation figures; France’s business survey; Spain’s foreign trade and updated GDP data; Switzerland’s balance of trade and current account; and Turkey’s consumer morale. On the monetary policy front, central banks in Norway, Switzerland, Sweden, and Turkey are likely to continue tightening their policies in response to persistently high inflation.

Monetary policy decisions will also take center stage in Asia, with all eyes on the People’s Bank of China’s loan prime rate decision following the surprise reserve requirement ratio slash this week.

Interest rate decision will also be the focus in Japan, with hawkish signals on the table after BoJ Governor Ueda suggested that positive interest rates may be appropriate in the long term. Japan will also release September PMI data, and the inflation rate and trade balance for August.

Monetary authorities in Indonesia and the Philippines. will also set new interest rates. In Australia, minutes from the RBA’s latest meeting will give further insights on its third consecutive rate hold, which was Governor Lowe’s last meeting. Other key Aussie releases include September’s flash PMIs. Elsewhere, New Zealand will release second-quarter GDP, current account, and August’s trade balance.

Monday 18 September

• China – Foreign Direct Investment ytd/y
• EU – German Buba Monthly Report
• UK – Rightmove HPI m/m

Tuesday 19 September

• Australia – Monetary Policy Meeting Minutes
• EU – Eurozone Current Account, Final CPI y/y, Final Core CPI y/y

Wednesday 20 September

• Australia – MI Leading Index m/m
• Japan – Trade Balance
• UK – CPI y/y, Core CPI y/y, PPI Input m/m, PPI Output m/m, RPI y/y, HPI y/y
• EU – German PPI m/m

Thursday 21 September

• Australia – CB Leading Index m/m, RBA Bulletin
• EU – Eurozone Consumer Confidence
• UK – Public Sector Net Borrowing, Monetary Policy Summary, MPC Official Bank Rate Votes, Official Bank Rate, BOE Inflation Letter

Friday 22 September

• Australia – Flash Manufacturing PMI, Flash Services PMI
• Japan – Flash Manufacturing PMI, National Core CPI y/y, BOJ Policy Rate, Monetary Policy Statement, BOJ Press Conference
• EU – 
  • Eurozone Flash Manufacturing PMI, Flash Services PMI
  • German Flash Manufacturing PMI, Flash Services PMI, Import Prices m/m
  • French Flash Manufacturing PMI, Flash Services PMI
• UK – Flash Manufacturing PMI, Flash Services PMI, GfK Consumer Confidence, Retail Sales m/m, CBI Industrial Order Expectations

Monday 18 September 2023

• The third week of September is the month’s most bearish week.
• The week after September Triple Witching Week (Week 38) has been down on DJIA 24 of the last 32 (last year down).
• Monday 18 September is the year’s third most bullish session.

The Stock Trader’s Almanac’s stats for the Benchmark Indices for Monday of Week 38 over a 21-year average are;

• Dow Jones (DJIA): Ridiculously Bullish 81.0%
• S&P 500 (SPX): Very Bullish 71.4%
• NASDAQ (COMP): Ridiculously Bullish 81.0%

The Pattern Trader™ Tools Screener stats for the Benchmark Index ETFs for Monday of Week 38;

• SPDR DJIA ETF Trust (DIA – 19yr Avg): Bearish 60.00%
• SPDR S&P 500 ETF Trust (SPY – 19yr Avg): Bearish 60.00%
• Invesco QQQ Trust Series I (QQQ – 13yr Avg): Bearish 57.14%

Monday 18 September

• China – Foreign Direct Investment ytd/y
• EU – German Buba Monthly Report
• UK – Rightmove HPI m/m
• US – 
  • September NAHB Housing Market Index (prior 50) at 10:00 a.m. ET
  • July Net Long-Term TIC Flows (prior $195.9 billion) at 4:00 p.m. ET

Featured Sector – Homebuilders

While the market has been focused on the mega-caps, the usual tech names, inflation rates, interest rates and treasuries, the Homebuilders have quietly been running up the charts since bottoming out last year.

In July, it kissed its year-old PhiB XOP (161.8%) and retraced into a Diamond that looked likely to break out in Week 37. Volumes had been accumulating during that consolidation, as it did last year when it formed its Inverted Head & Shoulders pattern between September and October. 

Then on Friday, it broke below the Diamond and down into the lowest channel of the current uptrend. Should Week 38 see XHB fall further, the Homebuilders will be testing its PhiB-Fan Support and ultimately, its channel support.

But before jumping to conclusions without reading through the entire article (and complaining thereafter like a little bitch 😉 … yeah, you know who you are) this is NOT about buying and holding, nor is it about shorting or buying puts like some rank amateur.

So read on … 

XHB, like all its components within, are reaching or have reached their historical highs and retraced as previously mentioned. That retracement/pull back is not a dip that should be bought into blindly.  

Most of the stocks’ PE Ratios look damn tempting to jump into and if you took the trouble to calculate some of their intrinsic values, you’d find that a lot of them are grossly undervalued in spite of their prices climbing the charts over the last one year.

The smarter traders are likely to wait till the September correction is done and dusted and look for long (bullish) ranges to ride back up to its historical highs. Invested investors are likely to hold but not likely to add and may even consider partial liquidation at this point in time. Whatever happens, I personally don’t like buying the high and will stay patient for a lower low at a significant support level.

What almost everyone might not consider is a short-sell for the long term. You might change your mind when you see where XHB’s price is right after Friday’s close …

Now that’s a Double Top to rival some of the most infamous housing bubbles in the last 100 years. Having said that, the problem with calling it a bubble is that it fails the criteria of a real bubble;

… a bubble is created by a surge in asset prices that is driven by exuberant market behavior. During a bubble, assets typically trade at a price, or within a price range, that greatly exceeds the asset’s intrinsic value (the price does not align with the fundamentals of the asset). ~ Investopedia

There are hardly any components within XHB that “greatly exceeds the asset’s intrinsic value”. 

So to consider the short-sell on the Homebuilders is going to be a purely technical thing with a support at $73.00 and another lower down at $65-half. Now, if you asked me, I’d say that’s suicide especially considering that we’re getting into the seasonally bullish quarters for industrials and materials – which include homebuilders and their co-stars – and the traditional year-end holiday bull run.

If you were considering a short for the next week or two, it might work except that you do have this small little event called the Federal Open Market Committee Monetary Policy Decision and a bunch of housing related data including the NAHB Housing Market Index, Housing Starts, Building Permits, Existing Home Sales and the weekly Mortgage Applications Index. 

Thus, XHB and the HomeBuilders stocks are in no-man’s-land and not yet ripe for picking in either direction.

So why am I posting this impossible situation? Well, firstly, I don’t and have never been a stock tipper. So if that’s why you’re reading this, you’re in the wrong place. I educate, and this is about understanding that not everything in the market is a trading opportunity … not immediately anyway. And that’s why you must read through everything. 😉

But don’t fret yet. We will be revisiting this in October’s MMO in two weeks’ time and hope that something favourable happens by then so that we can take some action. Secretly, I kinda know what I’m going to do already. 

Keep watching this space! 

The Most Bearish Fortnight Beckons

From last weekend’s WMO

“I ain’t buying anything … yet“

There’s no need to add to last week’s quote. It’s status quo for the coming week but that doesn’t mean I won’t be trading. Rest assured, I’m going to be a very busy man in the next two weeks! 

Happy Hunting!

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