USD/JPY The USDJPY accelerated lower on Friday after a triple daily Doji, adding to signals that short recovery from 133.62 (Dec 2 low, the lowest since Aug 16) might be over. Fresh bears hit 50% retracement of 133.62/137.85 upleg and eyeing key 200DMA (135.03) for retest, after attacks on Dec 2/5 failed to register a clear break lower. Rising negative momentum and most of moving averages being in bearish setup on daily chart, add to negative signals. Weekly close below 200DMA would be a minimum requirement to keep renewed bears in play and neutralize signals from formation of inverted hammer, reversal signal, on weekly chart. Res: 136.81; 137.85; 138.40; 140.00. Sup: 135.47; 135.03; 134.41; 133.62. Interested in USD/JPY technicals? Check out the key levels

Outlook: We get PPI and consumer sentiment today, scheduled to cause a stir but just as likely to fizzle. As noted before, PPI has been declining nicely since April. It was 8.0% y/y last month from 8.4% the month before and expected down to 7.2% today. A 7.2% reading would be 4.5% under the March peak reading–pretty darn big. Notice that for most of the year, expectations have been too high and the resolution of many supply chain issues has resulted in lower-than-expected outcomes.   Somewhat strangely, a “good” number like 7.2% or anything lower is bad news for the dollar, because it keeps awake that idea the Fed can do less and will start doing less sooner. A higher number would be a shock and give the dollar some support, if fleetingly.   Ah, the difference between what they say and what they do–sentiment surveys like the University of Michigan's index do not capture reality. In November, the index ended up revised higher to 56.8 from the preliminary of 54.7. The subindex for expectations was revised higher to 55.6 from 52.7. And inflation expectations for the year ahead lost momentum at 4.9% from 5.1% in the flash while the 5-year outlook was unchanged at 3%.   This time the market expects the sentiment index to come in only a skinch higher than Nov’s 56.8 at 56.9, despite the excellent holiday shopping we just saw. For what it’s worth, Trading Economics sees a dip to 56.4. But never mind–you can’t draw much conclusion from tiny changes like this. Anything in the high 50’s is good. We had a too-high 70.6 a year ago in Dec on wild happiness the pandemic was over, and then a too-low 50 in June when inflation started to bite–both outliers.   Forecast: the dollar will continue softer unless there is sizeable geopolitical crisis that drives investors back to the safe-haven, or the US data is so unfavorable (inflation persistently high) that they remember “oh yeah, Powell said higher for longer.”   For what it’s worth: We don’t believe the China story for a minute–the government relaxing Covid restrictions on protests and/or in part on pressure from Foxconn, which was losing business. Tiananmen Square might have been a long time ago (1989) but repression of the public doesn’t change. Locking down entire apartment buildings and forcing people into hospital camps was taking place only weeks ago. Something else is going on. Some suggest it’s a newfound prioritization of the economy. One contributing factor–the much-cited very high (20%) unemployment rate among young men. In the absence of guns, it’s hard to see why this would matter so much. Is it possible China is preparing for another lockdown at some critical level of Covid cases? Or preparing to invade Taiwan (or block the Strait)? Whatever is being prepared behind the curtain, it doesn’t justify stock market rallies.   Tidbit: About that awful, terrible, really bad winter Britain is about to get that we wrote about yesterday–last night PBS replayed an old Nova documentary about Dunkirk. The key was Churchill refusing to agree with members of his cabinet who wanted peace talks with Germany. (An equally important key was disabling German mines by magnetizing ships.) The rescue itself was so emotionally moving that the public was able to see past what was really a massive military failure. Does the UK now need leadership of this caliber and does Sunak have it? In any case, we shouldn’t underestimate the people’s ability to pull off another Dunkirk. Tough birds, those Brits (whatever Liz said).   Tidbit 2: See the chart. If the US oil inventory is at a 36-year low, doesn’t that imply upward pressure on oil prices? Well, no, not if output keep running at a hot rate. Still, this can’t be good. The US will start buying around $70 for the Strategic Oil Reserves and West Texas Intermediate hit $71.46 yesterday. The news the US is buying will be a rumor-mill story for some time. Meanwhile, an interesting side story–after the Keystone pipeline was shut down due to a leak in the US Midwest (one report has Nebraska and another has Kansas), WTI prices jumped about $3–but fell back the same day to the new low near $71. This suggests the market is convinced of lower oil prices pretty much no matter what.   Tidbit 3: The BIS issued an alarming report on the unknown size and nature of FX currency swaps. A number of articles raise the alarm, including the FT, which says the off-balance sheet nature of forwards and swaps is a black hole (for regulators).    “And that hole is astonishingly big. The BIS detective work suggests that there are “$80tn-plus” in outstanding obligations to pay US dollars in FX swaps – or forwards – and...

While gold’s sleigh is flying high, is a crash on the horizon? With so many narratives floating around, bullish seasonality, recession fears and consumer resilience have combined to create a mixed picture on Wall Street. However, with the gold price running well above its fundamental value, investors’ game of hide-and-seek should end in substantial liquidations.  For example, the S&P 500 has fallen by more than 17% in 2022. Yet, the bulk of the decline has been driven by four sectors. Source: Fidelity To explain, the red box above shows how communication services, consumer discretionary, real estate and information technology have been the worst-performing S&P 500 sectors year-to-date (YTD). In contrast, financials and materials (where the PMs live) have endured low double-digit declines, while defensive sectors like utilities, consumer staples and health care have fallen modestly.  Now, the four laggards have largely suffered due to higher interest rates, while economically-sensitive sectors like financials, materials, industrials and energy have mostly escaped investors’ wrath. For context, their outperformance is another example of why positioning does not support the ‘imminent recession’ narrative.  But, the important point is that with recession winds poised to grow stronger in late 2023, economically-sensitive sectors should catch up to the laggards and decline substantially.  To explain, the S&P 500 is a market-cap-weighted index, so large companies like Apple, Microsoft, Amazon and Alphabet have an outsized influence on the S&P 500’s performance. Conversely, an equal-weighted S&P 500 index assigns the same weight to all companies, so smaller stocks have more say. Therefore, if you analyze the blue line above, you can see that the S&P 500 equal weight/S&P 500 ratio has rallied sharply recently, and has largely been in an uptrend since mid-2021. This means the average stock is outperforming Big Tech, as investors rotate money into economically-sensitive sectors like financials, materials, industrials and energy. However, while Big Tech suffered mightily and liquidity-fueled assets like the ARK Innovation ETF (ARKK) and Bitcoin slumped as the U.S. federal funds rate (FFR) rose, the ‘old economy’ stocks should be the next shoe to drop, and a realization is profoundly bearish for gold. To that point, Morgan Stanley’s Chief U.S. Equity Strategist Mike Wilson said on Dec. 8: “I don’t think there’s as much of a distinction between value and growth at this stage of the economic cycle unless you’re talking about the defensive parts of value [like] utilities and staples and health care.” More importantly: “The problem with the value stocks now is they’re probably is just as vulnerable to the economic slowdown as the over- earning growth stocks were six or 12 months ago.” So, while resilient consumer spending and solid growth have investors hiding out in economically-sensitive sectors, they should suffer the same bearish fate as the pandemic winners. In a nutshell: it’s only a matter of time before the same slowdown that haunted technology stocks comes for financials, materials, industrials and energy. Likewise, while the gold price remains supported right now, that should change materially in the months ahead. Furthermore, after retracing 38.2% of its preceding decline, the S&P 500 sunk below its late-June high; and combined with a similar development confronting world stocks, the S&P 500’s technical outlook also remains highly bearish. In addition, with the fundamentals and the technicals in sync, the index’s medium-term backdrop is highly ominous. As further evidence, Morgan Stanley’s model predicts “significant downside” to S&P 500 earnings per share (EPS) growth in 2023. To explain, the blue line above tracks the year-over-year (YoY) percentage change in realized 12-month S&P 500 EPS growth, while the gold dashed line above tracks Morgan Stanley’s model estimate.  If you analyze the relationship, you can see that the pair often move in the same direction, and the gap on the right side of the chart shows how the gold line signals material weakness ahead.  As a result, with the technicals screaming risk off and an earnings recession poised to spook the bulls in 2023, the S&P 500’s suffering should weigh heavily on the gold price.  On top of that, let’s not forget about the bearish ramifications of silver’s outperformance. We’ve noted repeatedly that silver often runs away from gold before major drawdowns occur; and with the white metal correcting 50% of its 2022 decline, its recent outperformance is an important sell signal. Overall, there are a plethora of bearish indicators supporting lower gold prices. So, while seasonality keeps sentiment uplifted, don’t let the short-term strength cloud your medium-term judgment. As stated previously, every inflation fight since 1954 has ended with a recession, and this bout should be no different. Want free follow-ups to the above article and details not available to 99%+ investors? Sign up to our free newsletter today!

Next week, the ECB Governing Council will decide on the next interest rate step. The decision will be a rate hike of 50 or 75 basis points (bp). The public statements of the members were different during the last few weeks and did not give clear indications on the amount of the coming interest rate step. The environment remains difficult to assess. There are considerable uncertainties. Inflation has probably peaked and the economy is weak. However, it remains to be seen how many companies will pass on increased costs or take advantage of the situation and thus continue to fuel inflation, at least for the time being. The level of wage settlements is also a risk factor. So far, however, wage settlements are still within the ECB's expectations. Finally, it is still unknown what impact the interest rate hikes to date will have on the economy. Depending on the weighting of these factors, the assessment will be whether a smaller rate hike is already appropriate after two rate hikes of 75bp each or not. We expect a majority in favor of a 50bp rate hike next week. An additional argument in favor is that the ECB's decision to change the terms of the TLTROs has already initiated early redemptions and thus a reduction in liquidity. This will be compounded by the fact that a roadmap for reducing the APP portfolio is likely to be decided next week. This has risen to EUR 3400bn as a result of earlier ECB securities purchases. Until now, current redemptions have been reinvested, thus keeping the size of the portfolio constant. On average, these redemptions amount to just under EUR 25bn per month, which is probably the maximum possible reduction of the portfolio. Theoretically, it is conceivable that the ECB will also sell securities in order to achieve a faster reduction of the portfolio, but this is very unlikely, in our view. We expect the reduction of the portfolio to start in April, due to the lack of reinvestments. Finally, new forecasts from ECB economists will also be available. We expect the biggest change from the September forecasts to be in GDP growth for 2023, which will probably be revised downward close to zero. Inflation forecasts for 2023 could be revised slightly downward, as the September forecast assumed a much higher gas price. However, these revisions will hardly play a role in the ECB's further course. More exciting will be the ECB economists' expectations for 2025, which will be published for the first time next week. The issue is whether the inflation target of 2% is expected to be reached by then. To be sure, the result does not provide any compelling guidance for monetary policy. But depending on how it turns out, it supports the case for a tighter or softer monetary policy stance by the ECB. The market also expects a 50bp rate hike next week. How far will US interest rates rise? One day before the ECB, the US Fed will decide on the key interest rate. Uncertainty about the outcome is much lower than at the ECB. Indications, not least from Fed Chairman Powell, point to a high probability of a further interest rate hike of 50 basis points (bp). The outlook will be more exciting. After the meeting, the new survey of meeting participants of the committee deciding on monetary policy (FOMC) will be published. The last survey on the development of the key macroeconomic indicators dates back to September and Fed Chairman Powell has already announced that interest rate expectations have shifted upward since then. The median expectation in September was for rates equivalent to a 50bp rate hike next week, but to only 25bp for 2023, i.e. for the January/February meeting. The market is currently pricing in 50bp for both sessions, for a total of 100bp before the peak in this rate cycle is reached. This is also in line with our expectations. Thus, the market is already bracing for a moderate upward revision in FOMC members' expectations. The outcome of the survey should have good predictive power, as it relates to interest rate developments over the next few months, and thus there is little potential for changes in opinion until the actual decision is made. If there is any potential for surprise in the survey, it relates to the overall rate hikes still ahead and is likely to be on the upside. The cooling of the labor market, a declared goal of the Fed, has so far succeeded only to a minor degree. Inflation has been falling since the summer, but pretty much exclusively due to lower contributions from energy prices. In October, core inflation did show a slowdown, but this will hardly be enough for the Fed. On the first day of the two-day FOMC meeting,...

Summary Varying economic conditions have left consumers dazed and confused. Despite expecting joblessness to rise, consumers also expect income to go up; even as the Fed raises rates, consumers expect rates to go down. Short-term inflation expectations fell, longer-term did not. See The Full Report

PPI and core PPI came above expectations, fuelling a sharp S&P 500 decline upon the data release. Similarly to yesterday though, the market reaction isn't unequivocal as neither USD nor yields are correspondingly up. Real assets aren't tanking either, not even the 3m Treasury yield has moved much. And that leads me to think the bearish gap on the news release, will be taken on at least to the 3,965 level degree, after an otherwise positive, bullish turn in paper assets yesterday, which was accompanied by a not at all contradictory real assets message. Summing up, the (especially the one that Fed is looking at – the core) PPI figure has spooked the markets, but there is no deleveraging panic kicking in. Gold and silver are up – and so is oil, with copper likely to improve later today as well. The dollar isn't barking (remember yesterday's article featuring similar theme), and that's a telltale sign that a sharp selling spree isn't likely to kick in after today's opening bell. Being ready for all eventualities, watch for the opening selling pressure to ideally dissipate within dozens of minutes after the bell, and for solid bid lifting prices above 3,965 to materialize next. Failing that, 3,905-3,910 is the support next, which I however don't see as likely to be jeopardized – chop would be more probable instead of a fall, as the seasonal tendencies counter the sellers still. Similarly, precious metals and commodities are likely to weather today's volatility fine, with the former outperforming the latter (headwinds are to be more lasting in commodities as opposed to gold and silver, which benefit from signs of inflation being as sticky as I've been telling you about for months it would be.