The Economy Is Heating Up

E-mini S&P (March) / E-mini NQ (March)

S&P, yesterday’s close: Settled at 4158.25, down 12.75

NQ, yesterday’s close: Settled at 12,730.00, up 99.00

Fundamentals: A slew of economic data tells us the economy is heating up, and the Atlanta Fed’s GDPNow model for Q1 was revised higher to 2.4% yesterday from 2.2% (as of February 8^th). This comes after Retail Sales data yesterday for January confirmed the consumer is not only resilient but strong, with headline coming in at +3.0% m/m, the best in a year, versus +1.8% expected and Core at +2.3% (ex-autos) versus +0.8% expected. One may argue this is a notional amount; people are spending more and getting less due to inflation. We believe this argument has less validity, given we must learn to live in this new inflationary environment. Furthermore, inflation has leveled off in recent months but shows signs of reinvigorating. Of the categories, Department Store Sales soared by 17.5% m/m, after falling -6.5% during the holiday season in December. Right behind it was Eating and Drinking, which jumped by 7.2% m/m after a flat November. The world is different than it was a decade ago, and we have discussed this before; people can buy what they want, when they want, and have it delivered within 24 hours. In this ever-connected, technology-driven world, people now use the Thanksgiving through New Year’s timeframe to finally settle down. Therefore, we believe the slowing economy during that period, which the Fed was credited with, may have actually been arbitrary due to evolution. With people spending at Department Stores, working back in the office, and travel companies citing strong demand, not only is this not the activity of a slowdown, it leads to added spending while out and about. For us, the cherry on top is low credit card delinquencies, as seen in the chart below, an ever-tightening job market, and the early signs of a rebound in housing. Just yesterday, the NAHB Housing Market Index beat expectations at 42 versus 37, signaling decisively less negatively than forecast. Lastly, pundits cite a decrease in the savings rate, but ultimately, it’s the built-up excess savings. Goldman Sachs recently said Americans have spent down about 35% of their extra savings accumulated during the pandemic as of mid-January, and by the end of the year, they will have spent down about 65%.

Today brings more data to digest at 7:30 am CT. At the forefront is PPI, and producer prices are a leading indicator for consumer prices. U.S. PPI for January is expected to cool y/y with headline slipping to 5.4% from 6.2% and Core to 4.9% from 5.5%. However, m/m is expected to rebound to +0.4% and 0.3%, respectively. Weekly Initial Jobless Claims have been watched closely for any queues the labor market is beginning to loosen. The report two weeks ago hit the lowest level since last April at 183k, but last week picked up to 196k. Today is expected at 200k, a level we use to judge strength or weakness. Fresh Philly Fed is also due and on the heels of better NY Empire State Manufacturing. It is expected at -7.4, though a worsening, it would be the best level in five months. Rounding out the morning deluge is January Building Permits.

We then get a barrage of Fed speak. Cleveland Fed President Mester at 7:45 am CT, St. Louis Fed President Bullard at 12:30 pm CT, Fed Governor Cook at 3:00 pm CT, and others who may not be listed on schedule.

Technicals: E-mini S&P futures again failed to break below major three-star support early yesterday, opening the door for a bleed higher. Similarly, a significantly higher intraday low in the E-mini NQ futures early at 12,524 versus 12,390 the prior session, underpinned by ultra-high-growth momentum, helped lead the way higher as the session unfolded. Although the S&P is showing signs of containment and exhaustion while below major three-star resistance at 4168-4175, the NQ’s strength decisively breached trend line resistance, paving the way for a potential bull-flag breakout upon added strength today. Regardless, the momentum in this high-growth tech, which comes out of excessive negativity, is ignoring higher short-end rates on the week. Through this morning’s data and Fed speak, the reaction between the NQ and the 2-year yield on a relative basis will be critical. In fact, the NQ has not been below the 21-day moving average since January 10^th a similar run to July-August when the stretch lasted from July 14^th to August 22^nd. Major three-star support to downside is just as defined as resistance to the upside, in our levels below. Given yesterday’s late strength, we will need to see a shift back to neutral momentum in order to keep the tape within its consolidation range. This would come upon a break below first key supports defined in the S&P and NQ at… Click here to get our (FULL) daily reports emailed to you!

Crude Oil (March)

Yesterday’s close: Settled at 78.59, down 0.47

Fundamentals: Crude Oil has battled impressively after yesterday’s bearish EIA inventory report, rebounding off formidable support to regain the $79 mark. The headline data was as bearish as it gets, with Crude inventories rising by 16.283 mb while an increase in Gasoline inventories at 2.317 offset a drop in Distillate inventories at -1.285 mb. Furthermore, Net Imports overall fell w/w and demand was broadly lukewarm at best. The China story continues to buoy any sign of weakness, a meeting between U.S. and Chinese officials, and positive economic comments from China’s President Xi have all been a positive in recent days. From the EIA side, Cushing built less than API had forecasted and although the 4-week run of Gasoline demand remains below the 2021-2022 4-week average, stocks are decisively trailing the seasonal expansion. That story, coupled with strong economic data and a failure of the U.S. Dollar to really extend gains has helped underpin higher prices.

Technicals: Strength carrying from late yesterday helped drive price action to retest the 79.33-79.45 first key resistance upon the European open before paring back. Weakness yesterday on the heels of EIA held our first major three-star support perfectly at 77.15-77.46, a level that has held extremely well going back to Friday. Overall prices have consolidated around our Pivot and point of balance, aligning with our momentum indicator, detailed below; continued action above or below can help lead the tape. With the near-term range clearly defined as 79.33-79.54 resistance and 77.15-77.46, and given the pent up consolidation, a break outside of here is likely to test our major three-star levels at… Click here to get our (FULL) daily reports emailed to you!

Gold (April) / Silver (March)

Gold, yesterday’s close: Settled at 1845.3, down 20.1

Silver, yesterday’s close: Settled at 21.572, down 0.301

Fundamentals: After a tough session yesterday, Gold and Silver are again on their backfoot. This comes after PPI was hotter than expected for January while December was revised to be less disinflationary. Additionally, Initial Weekly Jobless Claims came in at 194k versus the 200k expected. However, Philly Fed Manufacturing did whiff at -24.3 versus -7.4, though this comes after a NY Fed Manufacturing beat yesterday. Ultimately, the precious metals space, when trading lower like this, and in such a macro environment, are going to lean on the Dollar and the risk-landscape. If the U.S. Dollar Index pushes above 104 and the S&P breaks below 4100, it is likely to weigh on precious metals in the near-term.

Technicals: Price action remains suppressed, but as we noted yesterday there are some significant levels of support just underneath the market (detailed below). Continued price action below our Pivot and point of balance, which aligns with our momentum indicator should lead to lower prices in the near-term. However, a move above first key resistance at … Click here to get our (FULL) daily reports emailed to you!

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Originally Posted February 16, 2023 – The Economy Is Heating Up