Expect some Fed officials to stay hawkish

Thoughts of the Day

Two US Federal Reserve officials maintained a hawkish stance, despite positive developments in inflation. The PCE Price Index indicated a 3% YoY increase (same as EXP, PREV +3.4%), lowest reading since Mar2021. Although data suggests inflation is heading to the 2% target, the FED is cautious. if inflation and job market moderation persist, hawkish comments will have less and less of an effect in the weeks ahead.

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Day Ahead

The Canadian Unemployment Rate is expected to increase slightly to 5.8% in November compared to 5.7% in October. The Employment Change is expected to show +14k jobs being added compared to +17.5 previously.

Federal Reserve Chairman Powell is due to participate in a fireside chat titled “Navigating Pathways to Economic Mobility” at Spelman College, in Atlanta.

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What Happened Yesterday

Market Movements as of New York Close 30 Nov 23
  • Fedspeak:
    Daly (2024 voter, slight hawk):
    “It’s still too early to know if the Fed is done hiking rates. I’m not thinking about rate cuts at all right now. Economy needs to cool down a little more.”
    Williams (current voter, slight hawk): “Key for policy is persistence of easing in financial conditions. Financial conditions are volatile and markets are sensitive.” He noted a significant decline in inflation as well.
  • The OPEC+ members agreed to voluntary output cuts of 1.66 million barrels per day (bpd) for early next year led by Saudi Arabia extending its current voluntary cut of 1 million bpd. This piece of news initially caused Brent oil prices to spike +0.56% to 84.18 (+2.02% on the day) ) before falling -4.95% to a low of 80.01 as the day progressed. It then recovered slightly but remained at lower levels through the rest of the day.
  • The US PCE Price Index showed that prices rose +3.0% Year-on-Year in October as expected, compared to +3.4% in September. The core index showed an increase of +3.4% as expected,lower than +3.7% in September. Although the inflation data was benign, US yields rose because of the hawkish comments from the Fed officials.
  • The US Treasury Yield curve inversion narrowed to 0.36% as the US 2-year bond yield rose +0.09% to 4.73% while the 10-year bond yield rose +0.10% to 4.37%.
  • The US stock futures traded within a small range with a slight positive drift in the Asian and London trading sessions. However, Nasdaq started to trade lower because of hawkish comments from Fed officials  but Dow Jones powered higher.
  • The US stock market continued to trade mixed (the major tech stocks falling while the industrials and health sector rising) when the New York trading session began. However, risk sentiment improved at midday, allowing the Nasdaq to erase some losses and eventually close the day higher. Consequently, the S&P 500 closed +0.38% higher (high: +0.42%, low: -0.29%), the Dow Jones jumped +1.47% (high: +1.52%, low: +0.46%) while the Nasdaq fell -0.25% (high: +0.16%, low: -1.01%).
  • Despite ending the day down, Nasdaq ended the month up 10.7%. The weakness on the day is likely because of month-end profit-taking sales. The S&P500 closed the month up 8.9%. November was the best month for Nasdaq and S&P500 since July 2022 and they are both within 1% of their 2023 highs. Dow Jones had its highest close of the year , up 8.9% for the month.
  • The crypto market traded mixed with Bitcoin down -0.37% and Ether up +1.69%
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Headlines & Market Impact

China consumption shows ‘no sign’ of a strong V-shaped recovery, McKinsey says

Notable Snippet: “But there are no signs it should be a strong, V-shaped recovery,” said Zipser, who is also a senior partner at McKinsey and author of a new report called “China Consumption: Start of a New Era.”

China’s retail sales have generally remained lacklustre since the onset of the Covid-19 pandemic in early 2020. Despite the end of Covid controls at the end of last year, falling global demand for Chinese goods and a slump in the real estate market have weighed on the country’s overall economy.

Looking ahead, growth is expected to slow. The government is tackling long-standing issues in the real estate sector, while tensions with major trade partners such as the U.S. have risen.

“The overall economic recovery and the recovery of the property market has not been what people hoped for,” he said. “People are aware of the geopolitical tensions, very aware of … exports declining.”

“They don’t yet have the confidence this will be different [in] 2024, 2025.”

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Oil kingpin Saudi Arabia extends its production cut into first quarter as OPEC+ holds policy

Notable Snippet: The influential Organization of the Petroleum Exporting Countries coalition and its allies, collectively known as OPEC+, on Thursday opted against formally deepening production cuts, while de facto leader Saudi Arabia extended its 1 million barrel per day voluntary trim into the first quarter, and other members announced further reductions.

The policy steps were decided in a virtual meeting delayed by internal disagreements over the baselines — the levels off which quotas are decided — of the OPEC group’s largest West African members, Nigeria and Angola. The spat postponed talks initially scheduled to be held in person in Vienna over the weekend of Nov. 25-26. The baselines of Angola, Nigeria and Congo remain under study.

The OPEC+ alliance had already instituted a 2 million barrel per day cut in place until the end of 2024, with several coalition members voluntarily pledging a further 1.66 million barrel per day decline over that same period.

While OPEC+ has not formally endorsed production reductions, market participants are following the possibility of further voluntary cuts announced by key participants to the coalition. Already, Saudi state media has announced that Riyadh will extend its voluntary reduction of 1 million barrels per day, which it has had in place since July, until the end of the first quarter of 2024.

Russian Deputy Prime Minister Alexander Novak, who represents his country in OPEC+ affairs, has said Moscow will implement a voluntary supply cut totaling 300,000 barrels per day of crude and 200,000 barrels per day of petroleum products over that same period, according to a Google-translated statement on Telegram.

Close Saudi ally Kuwait will enforce a 135,000 barrel per day reduction in the first quarter, while the Energy Ministry of OPEC member Algeria said it would trim a further 51,000 barrels per day. Oman said it will also reduce output by 42,000 barrels per day in that same period.

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SEC meets with Grayscale, BlackRock about potential bitcoin ETFs

Notable Snippet: The U.S. Securities and Exchange Commission is formally engaging with asset managers ahead of a much anticipated decision on whether the regulator will approve a bitcoin exchange-traded fund, according to memos published this week.

The regulator said in a memo that it met with Grayscale on Thursday about the potential conversion of the Grayscale Bitcoin Trust into an ETF. The SEC had previously blocked this move, but Grayscale challenged that decision in court and won.

SEC officials also met with representatives from BlackRock and the Nasdaq on Wednesday, according to a separate memo. BlackRock filed for a bitcoin ETF in June, followed shortly by a handful of other asset management firms.

While the SEC could still decide to block crypto ETFs, many industry experts expect that such funds will launch in the U.S. early next year. The regulator has delayed decisions on several bitcoin funds in recent months and may choose to approve or deny all applications at around the same time.

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Best,
Phan Vee Leung
CIO & Founder, TrackRecord