Why the Bar for the Fed to Be Hawkish Is High

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Why the Bar for the Fed to Be Hawkish Is High: Start a free trial of The Sevens Report.

What’s in Today’s Report:

  • Why the Bar for the Fed to Be Hawkish Is High
  • What the CPI Report Means for Markets

Futures are slightly higher despite soft economic data, as markets await the Fed decision later this afternoon.

Economically, data from the UK and the EU was bad and is slightly increasing growth concerns.   UK monthly GDP  and UK & EU Industrial Production all missed estimates.

Chinese growth concerns also rose as China declared industrial development as the #1 economic priority, potentially signaling less economic stimulus in 2024.

Today focus will be on the FOMC decision (2:00 p.m. ET, No change to rates expected) and the keys are the 2024 dot (does it show 50 bps of cuts?) and whether Powell slams the door on the idea of rate cuts (or leaves it slightly open).  In addition to the Fed, we also get another important inflation reading via PPI (E: 0.1% 1.0%). A further decline will be peripherally positive for markets.

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West Texas Intermediate Crude Tested Critical 2023 Support

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Oil Futures Finished Higher: Sevens Report Co-Editor, Tyler Richey, Quoted in MarketWatch

Oil futures end modestly higher after posting 7 consecutive weekly declines

Gains for the session came from a “combination of near-term oversold conditions in the futures market” after West Texas Intermediate crude tested critical 2023 support in the upper $60s last week, said Tyler Richey, co-editor at Sevens Report Research.

Oil futures finished higher on Monday after posting seven consecutive weekly declines.

Generally improving investor sentiment and risk-on money flows across other asset classes have also provided support to oil, he said. 

Also, click here to view the full MarketWatch article published on December 11th, 2023. However, to see the Sevens Report’s full comments on the current market environment sign up here.

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The Market Has So Aggressively Priced In A Dovish Fed

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The Market Has So Aggressively Priced In A Dovish Fed: Tom Essaye Quoted in MarketWatch on MSN

November jobs report likely to show a solid 190,000 increase, with unemployment staying at 3.9%

As a result, market participants will be much more sensitive to a hotter-than-expected number than to a softer-than-expected figure, said Tom Essaye, founder of Sevens Report Research, in a Thursday note.

That means the threshold for “too hot” figures — including payrolls, the unemployment rate and wages — that cause a pullback in both stocks and bonds is lower than it’s been all year because the market has so aggressively priced in a dovish Fed, he wrote.

“So, there’s less of a margin for error if the jobs report is stronger than expectations.”

Also, click here to view the full article published by MSN on December 8th, 2023. However, to see the Sevens Report’s full comments on the current market environment sign up here.

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FOMC Preview (What’s Expected/Hawkish If/Dovish If)

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What’s in Today’s Report:

  • FOMC Preview (What’s Expected/Hawkish If/Dovish If)

Futures are little changed ahead of today’s CPI report and following a night of generally positive economic data.

Economically, UK wages rose less than expected (7.2% y/y vs. (E) 7.7%). Contributing as another sign that global disinflation is still ongoing.  German ZEW Business Expectations, meanwhile, beat estimates (12.8 vs. (E) 9.2).

Earnings were underwhelming, however, as ORCL fell –8% on disappointing revenues.

Today focus will be on the CPI report and expectations are as follows: CPI (E: 0.0% m/m, 3.1% y/y), Core CPI (E: 0.3% m/m, 4.0% y/y).  Bottom line, a smaller than expected increase should fuel a solid rally even with the Fed looming tomorrow while a larger than expected increase could cause a sharp pullback, as a bounce back in inflation is absolutely not priced into stocks or bonds at these levels.

FOMC Preview - Magnifying Glass

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Catalyst #1 – CPI Preview: Good, Bad & Ugly

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CPI Preview: Start a free trial of The Sevens Report.

What’s in Today’s Report:

  • CPI Preview:  Good, Bad & Ugly
  • Weekly Market Preview:  The Last Busy Week of 2023 (Inflation Update, Fed Decision & Growth Reports)
  • Weekly Economic Cheat Sheet:  Inflation Tomorrow, Fed Decision Wednesday, Economic Growth Updates Thurs/Fri

Futures are slightly lower on digestion of the multi-week rally following a quiet weekend and ahead of a the last catalyst-filled week of 2023.

Economically, there was no notable data overnight. Investors are focused on the looming reports this week (CPI tomorrow, Fed Wednesday, growth data Thurs/Fri).

On Japan, a Bloomberg article pushed back on the expectation for rate hikes and Japanese stocks are rallying 1%.

This is the last potentially busy week of 2023 but it starts slowly as the only notable report today is the N.Y. Fed 1 Year Consumer Inflation Expectations (3.6%).  If expectations drop sharply (possibly below 3.0%) that could provide a mild boost to stocks. But with key events looming Tuesday-Friday, the bar to move stocks and bonds today is pretty high.

CPI Preview

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Jobs Day

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What’s in Today’s Report:

  • Jobs Day

Futures are little changed following a quiet night of news as markets await the jobs report later this morning.

Economically, the only notable number overnight was German CPI which met expectations, rising 3.2% y/y.

Globally, the yen is falling slightly but global yields are higher as markets digest a potential Bank of Japan rate hike later this month.

Today the jobs report is the key event and expectations are as follows:  180K job adds, 3.9% Unemployment Rate, 0.3% m/m & 4.0% y/y wages.  Keeping things simple, the key to today’s jobs report is whether it refutes the expectation for a March rate cut or reinforces it.  A “Too Hot” number will refute that March rate cut expectation and stocks and bonds will likely drop while a Goldilocks number will reinforce expectations for a March cut and stocks should rally.

Outside of the jobs report, we also get University of Michigan Consumer Sentiment (E: 61.9) and the 1-Year and 5-year Inflation Expectations but barring a major surprise these numbers shouldn’t move markets.

Jobs Day

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The OPEC+ Decision Was A Clear Disappointment

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The OPEC+ Decision Was A Clear Disappointment: Tyler Richey Quoted in Morningstar

Oil prices stretch loss to a 4th session in a row to settle at lowest since July

“The OPEC+ decision was a clear disappointment last week due to both the underwhelming amount of additional [oil] output curbs and the voluntary nature of the 2024 policy cuts,” said Tyler Richey, co-editor at Sevens Report Research.

“The market didn’t buy it, however, as the bears are pressing OPEC+ for more clarity on the long-term outlook for policy plans and reassurance that the group is willing to do ‘whatever it takes’ to keep oil near or above $80/barrel,” Richey told MarketWatch on Tuesday.

“Looking ahead, the price action in oil has become increasingly heavy, and if there is not some sort of positive or bullish market catalyst ahead, we are likely to see a test of the 2023 lows in the $67/barrel area” for WTI, analysts at Sevens Report Research wrote in a Tuesday note.

Also, click here to view the full MarketWatch article published on Morningstar on December 5th, 2023. However, to see the Sevens Report’s full comments on the current market environment sign up here.

Oil Inventories

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Sentiment Has Deteriorated Since The Start Of December

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Sentiment Has Deteriorated: Tom Essaye Quoted in Barron’s

Stocks Open Lower as Market Digests November Rally

“Investors will want to see more evidence that supports a soft landing in the data as sentiment has deteriorated since the start of December,” Tom Essaye writes.

Sevens Report Research’s Tom Essaye points out that the decision by Moody’s Investors Service to downgrade the outlook for Chinese government credit to negative from stable could be weighing on sentiment. Economic reports due in the day ahead are the Job Openings and Labor Turnover Survey and ISM Services Index, both at 10 a.m. ET.

Also, click here to view the full Barron’s article published on December 5th, 2023. However, to see the Sevens Report’s full comments on the current market environment sign up here.

One Potential Catalyst

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Jobs Report Preview

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Jobs Report Preview: Start a free trial of The Sevens Report.

What’s in Today’s Report:

  • Jobs Report Preview
  • An Excellent Explanation of the Economic Cycle
  • Oil Update (How Far Could It Fall?)

Futures are little changed despite hawkish commentary from the BOJ and more underwhelming economic data.

BOJ commentary overnight was hawkish and markets now expect a rate hike at the December meeting. And that expectation is pushing global yields slightly higher.

European economic data was again soft as German Industrial Production declined –0.4% vs. (E) 0.5%. This adds to the recent string of soft EU economic reports.

Today focus will remain on economic data and specifically weekly Jobless Claims (E: 222K) and Continuing Claims (1.91 million).  These numbers have been drifting higher lately and Continuing Claims just hit a two-year high.  If we see further upside in these readings today that will add to the growing list of readings that implies the economy is losing momentum and while that may not cause a drop in stocks today, a slowing economy will likely become a headwind in early 2024.

Jobs Report Preview

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Is It Time to Buy Gold

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Is It Time to Buy Gold? Start a free trial of The Sevens Report.

What’s in Today’s Report:

  • Is It Time to Buy Gold? Bull Case vs. Bear Case
  • ISM Services Index Takeaways – Still Healthy Readings But Cracks Emerge
  • JOLTS Plunge Below Pre-Pandemic Trend

U.S. equity futures are tracking global stocks higher this morning. More underwhelming economic data overseas is helping bolster the case for rate cuts from the world’s biggest central banks in the first quarter of 2024.

Economically, German Manufacturer’s Orders fell -3.7% vs. (E) +0.5% in October. Eurozone Retail Sales edged up just +0.1% vs. (E) +0.3%. This is helping drive a bid in bond markets amid dovish money flows across asset classes today.

Looking into today’s session, focus will be on economic data early. The ADP Employment Report (E: 123K), International Trade in Goods and Services (E: -$64.1B) and Productivity and Costs (E: +4.8%, -0.9%) data will release before the bell.

Finally, there are no Fed officials scheduled to speak today. So the market will be looking for a still healthy but not “hot” ADP print, steady trade data, and a continued decline in unit labor costs (wage inflation) to help support soft-landing hopes and extend the November rally.

Is It Time to Buy Gold

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