The Debt Limit Clock Counts Down – Again!

The US Treasury is fast approaching the debt ceiling, which begs the question – what then? Will Government spending be crimped, will the ceiling be raised again, or will more unconventional strategies be deployed?

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Markets Betting Against The FED Again?

U.S. stocks ended up sharply on Wednesday, with the S&P 500 and NASDAQ gaining more than 1% each as investors were optimistic ahead of an inflation report that could give the Federal Reserve room to dial back on its aggressive interest rate hikes.

Investors are holding their breath in anticipation of Thursday morning’s Consumer Price Index inflation report —arguably the most important piece of economic data so far this year. There’s a lot riding on the outcome—if inflation keeps falling, that could support a market rally, while higher-than-expected inflation could send stocks plummeting.

After a stormy 2022, the Federal Reserve’s battle against inflation has become the chief preoccupation on Wall Street —with investors ascribing significant meaning to any economic data that could indicate what the Fed does next.

Recent data has been muddy. December’s hotly anticipated jobs report had something for everyone —easing wage growth and easing unemployment. Fed meeting minutes, released last week, also didn’t offer much in the way of conclusive answers.

That’s why this CPI report will command attention and go a long way toward shaping market expectations for the first Federal Reserve policy meeting of the year. The Fed Funds Futures market still sees a high probability of a quarter percentage point rate hike on February 1, but the results of the CPI report could change that.

Yet inflation swaps, transactions in which one investor agrees to swap fixed payments for floating payments tied to the inflation rate, are indicating that investors believe inflation will come down to 2.5% in the next seven months, even as the Fed’s own projections say inflation will remain well above 3% until 2024.

Bets that the Fed will soon pivot away from elevated interest rates, even as officials say that they won’t, could mean more market volatility lies ahead.

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Beware Data Is Not Neutral!

The latest edition of our finance and property news digest with a distinctively Australian flavour.

Any incoming data requires interpretation to make sense. And the truth is, factors like recency bias, expectations, and hopium can all influence how newsis interpreted, and decisions made. We saw this on Friday when US markets read the data as signs of a slowing economy, and immediately went to the FED easing rate rises, despite earlier news that they are keeping at the rate rising until inflation is crimped. Treasury yields fell sharply as investors continued to price in the step down in the pace of rate hikes at the Fed’s meeting next month.

But I think the central bank will need to see further slowing of price increases in the December inflation report, due out next week, before deciding whether to slow its next rate hike. It raised rates 50 basis points in December.And future earnings expectations are likely overdone for now, so perhaps markets were one sided in their interpretation of the data. In the minutes from the Fed’s December meeting [released] this week, it was unanimous among members of the FOMC group that they are going to keep interest rates high all year long. We will see.

CONTENTS

0:00 Start
0:15 Introduction
0:30 Data is not Neutral
1:30 US Jobs Report and Macro
3:40 US Markets
7:40 Oil Down
10:20 Gas Down
12:35 Europe
14:00 China and Asia
18:00 “N” Shaped Recovery
19:00 Australian Market
20:19 Gold too high?
21:40 Crypto Bearish
23:25 Summary and Close

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A Tale Of Two Central Banks!

Significant news from the Federal Reserve (FED) and The Peoples Bank Of China (PBOC) shows how divergent their two monetary policy paths are. The FED is committed to lifting rates sufficient to snuff out inflation (despite the markets continually seeking a pivot) and withdrawing stimulus while the PBOC is seeking to provide additional support for the Chinese economy, including the property sector.

This divergence is striking and will have significant impact on exchange rates and global financial flows. Both though are talking about Central Bank Digital Currencies.

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DFA Live Q&A: HD Replay 2023 Investing Outlook With Damien Klassen

This is an edited edition of my recent live show, where I discussed the outlook for 2023 investing with Damien Klassen, Head of Investments At Nucleus Wealth and Walk The World Funds.

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Buckle Up! 2023’s Bumpy Ride Ahead…

At the end of the year, we can look back and pick over the coals of the old and look ahead to the new. But of course, it’s an artificial delineation, and the forces mustering at the end of the old year such as recession risk, rising interest rates in response to inflation, Ukraine and COIVD all are still in play.

Remember U.S. stocks just polished off their worst year since 2008 with a loss on Friday, bringing the year-to-date decline for the S&P 500 to 19.4%, its largest calendar-year drop since 2008. The only years where stocks fared worse were 2002, 1974 and 2008. The same holds true for the Dow Jones Industrial Average, which shed 8.8% this year, and the Nasdaq Composite, which lost 33.1%.

As previously high-flying megacap technology stocks and other interest-rate sensitive assets crumbled, value stocks outperformed this year, sending the Dow to its biggest calendar-year outperformance vs. the Nasdaq since 2000. The blue-chip gauge also recorded its biggest outperformance vs. the S&P 500 since the index’s creation. Energy stocks were a lone bright spot, as the S&P 500 energy sector recorded its best year on record with a 59% gain.

CONTENTS

0:00 Start
0:16 Introduction
0:30 Annual Performance
1:53 US$
2:50 Bonds And Stocks Fall
6:15 Oil
6:40 Gold
7:00 Bitcoin and Gold Compared
8:50 Europe and UK
11:09 China And COVID
11:35 Australia
13:22 Recession Scenarios
19:42 Factors To Consider
24:15 Regulating Crypto
26:04 Conclusion and Close

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Falling Into The Close Of The Year!

More weakness in markets as we close the year. The realisation of higher rates and recession risk hitting earnings is hitting home as big-tech takes another hit.

So we look at the market action and consider the signals ahead.

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Muddling Through: Market Update For Week To 24th Dec 2022

Investors have dumped equities at a record pace in the days since major central banks signaled, they won’t be deterred in their fight against inflation—a fitting end to the worst year for world stocks since the global financial crisis. Equity funds were hit by outflows of almost $42 billion, the highest ever, in a week when the Federal Reserve, the European Central Bank and the Bank of Japan all sounded staunchly hawkish notes in their policy outlook for next year, squashing bets of an imminent return to the era of cheap money.

The markets drifted into a weary close ahead of the Christmas break and closed slightly higher on Friday and Treasury yields advanced as investors digested a deluge of economic data ahead of the holiday long weekend. But this capped a week fraught with worries over the Fed’s restrictive monetary policy and related recession fears, and volumes were way down, with thin trading volumes creating more exaggerated moves Thursday and Friday. On U.S. exchanges 7.75 billion shares changed hands on Friday compared with the 11.41 billion averages for the last 20 sessions.

On the political front, The U.S. House of Representatives passed the $1.7 trillion bill to fund government operations on Friday by a vote of 255-201, paving the way for President Joe Biden to sign it into law.

Investors have been jittery since last week as the Fed indicated that it remains stubbornly committed to achieving the 2 per cent inflation goal and projected rate hikes to above 5 per cent in 2023, a level not seen since 2007. The markets are on edge over what the path for Fed policy is going to be for next year as that’s going to drive the economy and corporate earnings.

CONTENT

0:00 Start
00:17 Introduction
2:00 US Macro
4:08 Latest PCE
6:35 US Markets
8:40 Gold, Oil
10:50 Europe
12:45 Japan Surprise
14:40 China and COVID
16:20 Australian Markets
19:45 Australian Macro
22:30 Crypto
23:40 Close

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Wall Street’s Winter Freeze

Well, the temperatures in the US are set to tumble driven by a significant arctic blast – leading to perhaps the coldest Christmas Day on record.

And Wall Street came out in sympathy, reversing the anemic gains from the last couple of days, during which the talk of the Santa Rally was again on – though I had my doubts. And again, trade volumes were lower than trend, with10.88 billion shares changing hands, compared with the 11.24 billion average for the last 20 trading days.

And weirdly it was the good news is bad news syndrome, because data again underscores the likelihood the FED will continue to lift rate, into a recession. Indeed, Wall Street’s major averages closed lower on Thursday with technology-heavy NASDAQ’s 2% drop leading losses as investors worried that data showing a resilient economy would lead the U.S. Federal Reserve to keep hiking interest rates for longer than feared.

The final estimate of the third-quarter U.S. gross domestic product was for 3.2% annualized growth, above the previous estimate of 2.9%.
Meanwhile, the Labor Department said filings for state unemployment benefits rose to 216,000 last week but were below economist estimates for 222,000.

The job market, meanwhile, remained tight as initial jobless claims fell less than expected last week.

“The labor market remains very tight,” Jefferies said in a note. “We expect that it will soften eventually, but it is starting from a very significant position of strength, and it will take a little while longer for the cracks to form.

And a third report showed the Conference Board’s leading indicator, a gauge of future U.S. economic activity, fell for a ninth straight month in November.

“We’re moving past one of the big worries of 2022 which was the Federal Reserve response to high inflationary pressure to the worry about 2023, which is a recession unfolding in the United States and probably globally too,” said Matt Stucky, senior portfolio manager for equities at Northwestern Mutual Wealth Management Company. “Today’s data, in my mind, kind of confirmed this is the direction we’re heading,” said Stucky, adding that high inflation, a bad economy and tight job market should lead investors “to come to grips with reality that earnings estimates are too high” for 2023.

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