LIVE MARKETS-Fed on track, but more to do -DataTrek

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 LIVE MARKETS-Fed on track, but more to do -DataTrek
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* DJI ticks green, Nasdaq just below flat; chips, FANGs green * Utilities weakest S&P 500 sector: tech leads gainers * Dollar, bitcoin gain; gold down; crude slides ~4% * U.S. 10-Year Treasury yield rises to ~3.79% Nov 17 - Welcome to the home for real-time coverage of markets brought to you by Reuters reporters. You can share your thoughts with us at FED ON TRACK, BUT MORE TO DO -DATATREK (1405 EST/1905 GMT) Inflation expectations imbedded in 5- and 10-year U.S. Treasury Inflation Protected Securities (TIPS) are important datapoints to watch according to Nicholas Colas, co-founder of DataTrek Research. As Colas sees it they reflect the market’s best judgment of whether the Federal Reserve can reach its goal of 2% inflation goal over the medium/long term. He adds that the Fed itself watches TIPS-implied inflation as a market-based measure of confidence in U.S. monetary policy’s ability to push inflation back down to acceptable levels. Here is a rough recreation of Colas' chart showing the evolution of the TIPS market’s expectations for U.S. inflation from 2020 to the present. The orange line tracks expected annual inflation over the next 5 years, and the purple does the same over a 10 year horizon: Current 5- and 10-year expected inflation is around 2.35% and has been heading lower since late October. Colas' takeaway is that the TIPS market is saying that the Fed is on the right track in terms of getting structural inflation back to 2.0%, but their work is not yet complete. "We should expect Federal Reserve speakers to continue to talk about further rate hikes and wave off questions about any pause to this process." Separately, Colas also notes that the TIPS market is ignoring all the chatter about the Fed raising its inflation target to 3% next year. (Terence Gabriel) ***** ANNUM MINUS HORRENDUM: LOOKING TO 2023 (1255 EST/1755 GMT) Nearly thirty years ago to the day, as recounted in a currently streaming series, Queen Elizabeth II, in a speech marking her 40th year on the throne, called 1992 her "annus horriblis," saying with royal understatement that the year was not one "on which I shall look back with undiluted pleasure." Three decades later, investors could say much the same about 2022. Persistent inflation, rising interest rates, a bear market and weakening earnings are to blame, along with the looming specter of global economic contraction. So what's in the cards for 2023? Will market participants be able to refer to the coming year as "annum minus horrendum" (that's "a year less horrible" for those who skipped Latin, or can't be bothered with Google Translate)? A UBS research note offers answers to those questions, christening the upcoming year as "a year of inflections." "Inflection points for inflation, interest rates, and growth are all likely in the year ahead—and navigating them will be key to investing success in 2023," writes the UBS team headed by chief investment officer Mark Haefele. "History tells us that durable turning points for markets tend to arrive once investors begin to anticipate interest rate cuts, and a trough in economic activity and corporate earnings." While none of those things are true today, UBS warns that "those currently sheltering from volatility will need to plan when, and how, to head back into riskier assets." To be specific, Haefele and team sees defensives and value stocks as a decent bet, singling out consumer staples and healthcare, with the caveat that an attractive opportunity to re-enter cyclicals and growth stocks "may emerge later in the year." Pivoting to Washington, the note says the red wave that wasn't could grease the rails for Democrat policy proposals, particularly if "factional divisions flare up" amongst Republicans. The note also warns of congressional brawls over the debt ceiling and other contentious issues later in the year. (Stephen Culp) ***** CRYPTO MARKETS NEED TO GROW UP -CRESSET (1215 EST/1715 GMT) The rise of crypto in many ways was a response to the 2008 financial crisis, as a growing faction of investors lost confidence in the traditional banking system. Now it appears the crypto world is grappling with its own crisis of confidence. This after, along with Alameda Research LTD, its affiliated trading firm, filed for bankruptcy last week in the face of massive withdrawals by their customers. While the demise of FTX is still being investigated and its broader impact is still playing out, Jack Ablin, chief investment officer and founding Partner at Cresset, believes the Fed’s tightening cycle was certainly a factor in the crypto sector’s troubles. "By raising overnight rates during 2022 from zero toward four per cent, the Fed wrung out speculation from the market and ushered in the spectacular decline in crypto token values." Bitcoin, the sector’s most widely watched token, is trading around $16,500, down from nearly $61,000 in the last 12 months. While Ablin says that it’s too early to predict a widespread crypto cascade, this year’s events carry broader implications for investors. The first, he says, is regulation. The wild world of unregulated crypto creation and trading will likely be reined in. In traditional markets, pairing an exchange and a trading firm is a conflict of interest that exposes customer funds to risky trading strategies. However, Ablin notes that the opaque and unregulated crypto world "allows conflicted combinations to coalesce," and so it appears "inevitable that broader regulation of the crypto markets is coming." Another observation of Ablin's is that this years’ experience represents a stunning setback for those calling crypto an "asset class." In fact, he believes it is increasingly unlikely that digital currencies could secure a place as a strategic asset class in institutional asset allocations. "The case for crypto as a portfolio diversifier has been undercut as Bitcoin is poised to suffer its third 80 per cent drawdown since 2014. Until the space is regulated and standardized, the crypto market structure is far too risky for institutional investors." Ablin's bottom line is that crypto markets "need to grow up before they can command attention and respect from the mainstream investment community." (Terence Gabriel) ***** TREPIDATION TRIPTYCH: HOUSING STARTS, JOBLESS CLAIMS, PHILLY FED (1119 EST/1619 GMT) Bad news comes in threes, as the superstitious among us are fond of saying. And the trio of economic reports unleashed on Thursday would appear to back that up. Groundbreaking on new homes dropped 4.2% last month to 1.425 million units at a seasonally adjusted annualized rate (SAAR), according to the Commerce Department. Analysts expected a smaller 2.0% drop, but the SAAR number landed above consensus, owing to an upward revision of the prior month's data. Building permits, considered among the most forward-looking housing market indicators, also fared better than economists feared, dropping 2.4% to 1.526 million units SAAR. The erstwhile COVID darling, for many months the sector has been groaning under the weight of its pandemic success, which began as a stampede for the suburbs in reaction to social distancing mandates. Since then, home prices have sky-rocketed, and mortgage rates are hovering around levels last seen when the housing bubble was about to burst. "The housing market index has declined every month this year and fell to the lowest level since April 2020 in November," writes Rubeela Farooqi, chief U.S. economist at High Frequency Economics. "And mortgage purchase applications and home sales have plunged this year." "For building activity, elevated input costs and shortages coupled with weaker demand remain constraints for now," Farooqi adds. This sorry state of affairs was reflected in Tuesday's dreary Homebuilder Sentiment print, which showed the mood in the residential construction space souring to it's lowest level in a decade, barring the brief one-month COVID crash of April 2020. The number of U.S. workers filing first-time applications for unemployment benefits inched down by 4,000 last week to 222,000. While it feels tedious to keep typing these same five words - "the labor market is tight" - the fact is it remains true, with nearly two open jobs for every unemployed worker. And while fewer jobless claims is good news in normal times, markets are currently feeling their way through the upside down world of hawkish Fed policy, where a tight labor market translates to hot wage inflation. "In a different world with low inflation, steady jobless claims and a solid labor market would be good news," says Jim Baird, chief information officer at Plante Moran Financial Advisors. "Instead, steady labor market conditions against a backdrop of persistent inflation raises the stakes for the Fed." "The result? More tightening – and still higher short-term interest rates – to come," Baird adds. At last glance, financial markets have priced in an 80.6% likelihood of a smaller, 50 basis point interest rate hike at the conclusion of Powell & Co's upcoming December meeting, according to CME's FedWatch tool. So investors are scanning the horizon for any hopeful signs that the unemployment rate will begin to rise in earnest. Those can be found in the rising four-week moving average which suggests joblessness is on an upswing, a notion supported by recent layoff announcements, particularly in the tech sector. Additionally, ongoing claims, reported on a one-week lag, rose by 13,000 to 1.507 million, landing a hair above expectations and breaching 1.5 million for the first time since March. Still, the metric remains well below the pre-pandemic 1.7 million level. The graphic below shows initial claims against Challenger Gray's planned layoffs data. In the broad picture, there does indeed appear to be some labor market softening, if only in dribs and drabs. Finally, the Philadelphia Federal Reserve would have you know that factory activity in the Atlantic region is tanking this month, contradicting Empire State's return to expansion, as revealed on Tuesday. The Philly Fed Business index moved in the opposite than the one predicted by analysts, sliding 10.7 points to -19.4, a considerably more dismal print than the -6.2 consensus. A Philly Fed/Empire State number below zero signifies monthly contraction. "The survey indicates that manufacturing is under pressure, but that’s not news," says Ian Shepherdson, chief economist at Pantheon Macroeconomics. "The weighted average level of the key Philly Fed components suggests little change in the November ISM manufacturing index, but we need to see the other regional reports before we finalize our forecast." Scratching beneath the surface, there are glimmers of good news. While new orders inched further into contraction, capex gained altitude and prices paid eased a tad - glad tidings for inflation worry-warts. Wall Street appeared determined to extend Wednesday's sell-off in morning trading, after the Fed's Bullard made remarks that seemed to yank the rug from under the doves. A broad rout has hit all major S&P sectors, with materials the weakest group. Economically sensitive transports, and small-caps are also among big losers. (Stephen Culp) ***** HIGHLY-SHORTED CRYPTO STOCKS IN SPOTLIGHT -S3 PARTNERS (1045 EST/1545 GMT) Highly-shorted cryptocurrency and blockchain-related stocks have taken a knocking since last week after FTX's bankruptcy sent shockwaves across the digital assets industry, providing fresh gains to bearish investors' portfolio. The top eight most shorted crypto stocks (refer to table below) have 14.8% of their free float shares in short positions, almost three times more shorted than the average U.S. stock, notes Ihor Dusaniwsky, S3 Partners' Managing Director of predictive analytics. Short sellers are paying almost nine times as much financing costs to short these stocks, he adds. Block and Coinbase Global had the largest amount of short covering four weeks ago, but over the last week they saw a complete reversal in sentiment as FTX turmoil unfolded and had almost $93 million of new short selling, Dusaniwsky noted. The path forward for these stocks, however, is not very clear. "With the underlying crypto currency market in temporarily disarray, price fluctuations in these stocks will see shorting activity see-saw between shorting and covering as momentum trading overtakes fundamental investing in these stocks," Dusaniwsky writes. Shorting these crypto stocks has been a very profitable trade in 2022, fetching bearish investors gains of 90% for the year, with 9% gains in November alone, far outperforming both the S&P 500 and Nasdaq indexes. Crypto stocks and ETFs offer exposure to digital assets on a regulated exchange so retail and institutional investors don't have to worry about securely storing their crypto and eluding hacks and heists if they were to dabble in the spot market. Here's S3 Partners' list of crypto stocks with highest short interest as of Nov. 15: Name Short Short Interest % of Interest free float Block Inc 5.1% $1.91 bln Coinbase Global Inc 18% $1.58 bln Microstrategy Inc 34.1% $557.5 mln Robinhood Markets Inc 8.2% $360.7 mln Marathon Digital Holdings 30.7% $333.1 mln Inc Riot Blockchain Inc 16.4% $133.7 mln Silvergate Capital Corp 11.2% $119.0 mln Bakkt Holdings Inc 21.2% $25.2 mln Total Crypto Short Interest: 14.8% $5.01 bln (Medha Singh) ***** WILL POWELL STICK TO VOLCKER'S DOCTRINE, KEEPING AT IT? (1020 EST/1520 GMT) How tough is Federal Reserve Chairman Jerome Powell? Will he cave when the market howls as higher interest rates cause the pain he's forecast is the big question haunting Wall Street. The market has been skeptical about the Fed's willingness to keep aggressively raising rates as a potential recession looms, impatiently waiting for the inevitable "Powell pivot." Looking for answers, Michael Arone, the chief investment strategist at State Street Global Advisors' U.S. SPDR business, reached out to Richard Fisher, the former Dallas Fed President who for many years sat next to Powell at policy meetings. Arone learned from Fisher that on Powell's desk is a copy of former Fed Chairman Paul Volcker's book, "Keeping At It: The Quest for Sound Money and Government." Arone says that according to Fisher, "Powell knows the way to go down in the history books is to slay the inflation dragon and he's hell bent on doing it." Powell's reappointment as Fed chair a year ago bolstered his confidence and there hasn't been a dissenting vote against each 75 basis-point hike since June, Arone says in "What I Learned About the Fed's Fight Against Inflation from Richard Fisher." It seems clear that a Powell pivot won't be coming any time soon, given Powell's personal resolve to defeat inflation and his strong support in Washington and a unified Federal Open Market Committee, Arone said. The old adage "Don't fight the Fed" applies whether the central bank is easing or tightening, he said. "It's also important to recognize that the Fed's terminal rate is a real rate. And since a real rate is the goal, the Fed has a lot more work to do," he said. (Herbert Lash) ***** U.S. STOCKS DUCK AS A FED HAWK CIRCLES (1000 EST/1500 GMT) Wall Street's main indexes are lower early on Thursday as mixed economic data and hawkish comments from a Federal Reserve official spurred concerns that the U.S. central bank would not tone down its aggressive stance on interest rate hikes. St. Louis Federal Reserve President James Bullard said that rate hikes so far "have had only limited effects on observed inflation," and even under a "generous" analysis of monetary policy the Federal Reserve needs to continue raising interest rates probably by at least another full percentage point. A number of other Fed officials are scheduled to speak today including Federal Reserve Bank of Atlanta President Raphael Bostic, Federal Reserve Board Governor Michelle Bowmanon, Federal Reserve Bank of Cleveland President Loretta Mester, and Federal Reserve Bank of Minneapolis President Neel Kashkari. It remains to be seen if they will make any market moving comments. The Nasdaq is leading declines among the main indexes, and economically-sensitive transports are being hit harder. All S&P 500 sectors are red with communications services, and materials taking the biggest hits. Staples are posting the smallest decline. With the weakness, the S&P 500 is back down to test support at its 100-day moving average, which is now around 3,908. Here is a snapshot of where markets stood shortly before 1000 EST: (Terence Gabriel) ***** CRUDE OIL FUTURES: DESTINED TO SLICK AND SLIDE LOWER? (0900 EST/1400 GMT) Oil extended declines on Thursday as concerns over geopolitical tensions eased and as rising numbers of COVID-19 cases in China added to demand worries in the world's largest crude importer. Earlier this year, on March 7th and 8th, NYMEX crude futures topped at $130.50 on an intraday basis, and at $123.70, on a daily closing basis. At that time, they appeared extended above their 200-week moving average (WMA), and at risk for a reversal: In early March, and again in early June, on a weekly closing basis, CLc1 topped at 1.98x its 200-WMA. This was just shy of its 2008 peak at 2.07x and its 1990 top at 2.08x. Subsequently, in late September, crude fell to as low as $76.25, while weekly disparity hit 1.25. On Thursday, the futures, down about 2% at around $84.00, are trading at 1.30x their 200-WMA, which now resides around $64.70. Since 1990, and prior to 2022, there have been seven 200-WMA disparity peaks, 1.38x or higher. In six of those instances, crude ultimately retreated to, and then below, its 200-WMA (sub-1.00 disparity). It was only subsequent to the 2005 peak, that crude bottomed in early 2007 at 1.04x the 200-week MA. Not quite 1.00, but pretty close. Thus, traders remain focused on whether the 200-WMA will continue to work its magic as a powerful magnet. Crude could, of course, mark time and churn, allowing the moving average to ultimately catch up (the moving average is currently rising 15-20 cents per week). But that would at least suggest a period of more stable prices. A longer-term return to the disparity support line from 1987, which has coincided with major crude lows over the past 20+ years, could suggest potential for a massive decline to the low-$20.00 area. Crude has nearby hurdles in the $93.75/$97.66 area. The resistance line from its early-March high is now around $113.00. A weekly disparity close above the 2.07/2.08 highs (crude roughly $135+), however, can be a game-changer on the charts, and instead suggest a major upside breakout is underway. (Terence Gabriel) ***** FOR THURSDAY'S LIVE MARKETS' POSTS PRIOR TO 0900 EST/1400 GMT - CLICK HERE (Terence Gabriel is a Reuters market analyst. The views expressed are his own)


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