Stock Market Rollercoaster Ride Ends with Higher Weekly Close

The major U.S. stock indexes settled mixed on Friday, ending a tumultuous week which featured volatile price swings in each direction. For the week, the major averages settled at least 2.75 percent higher, posting their first weekly gain in four. Nonetheless, unless the markets post a dramatic recovery on Monday, U.S. stocks will finish their worst December performance since 1931.

In the cash market, the benchmark S&P 500 Index settled at 2485.74, up 3.09 or +0.12%. The blue chip Dow Jones Industrial Average finished at 23062.40, down 76.42 or -0.31% and the tech-based NASDAQ Composite closed at 6584.52, up 5.03 or +0.07%.

The Dow finished lower after giving up early gains. The move was fueled by a mixed performance by its major components. A weaker energy sector drove the S&P 500 lower after the index rose as much as 1.26 percent. The NASDAQ Composite was primarily supported by solid gains in Apple, Amazon and Netflix.

Weekly Rollercoaster Ride

To put this week’s price action in perspective, in just two and a half days, the S&P 500 posted its worst Christmas Eve performance ever, its biggest gain since 2009 and its largest intra-day positive reversal since 2010.

Higher Weekly Close Doesn’t Erase Worries

Despite the higher weekly close, several investor concerns are expected to carry over into the new year. These include fears of a monetary policy mistake by the Federal Reserve, an ongoing government shutdown in Washington and potential signals the global economy may be slowing down. Investors are also eyeing the trade relations between the United States and China as talks continue to move toward the March 1 deadline to strike a trade deal.

Volatility Expected to Continue

Although some investors are blaming this week’s wild price swings on the illiquidity in the market due to the Christmas and New Year holidays, the volatility is likely to continue into next year. The growing uncertainty over whether the US is headed toward a recession, confusing Fed policy, the U.S.-China trade dispute and President Trump’s possible legal problems are major issues weighing on investor confidence.

Wasted Year

All three major U.S. indexes posted all-time highs in 2018, however, all are in a position to finish the year lower. This type of dramatic reversal on the yearly charts is pretty rare and is a strong indication that the selling is greater than the buying at current price levels. This type of chart pattern can be indicative of a major top which could lead to a 2 or even 3 year bear market.

With one day to go in the year, the Dow and S&P 500 are on track to post their first yearly loss since 2015. The NASDAQ Composite is on pace to post its first yearly decline in seven years.

Value-Seeking Buyers Drive Stocks Higher After Erasing Massive Losses

The major U.S. stock indexes posted a spectacular reversal late Thursday, erasing huge intraday losses while adding to the massive gains from Wednesday’s trading session. There were no notable changes in the news or the fundamentals, which usually means the rally was based on technical analysis.

For a second day, value-seeking buyers stepped as the markets approached a major retracement zone created by the Donald Trump Election Low on November 9, 2016 to the October All-Time Highs. Since reaching the top, the markets have corrected more than 50% of that trading range, creating a buying opportunity for value seeking investors.

In the cash market, the benchmark S&P 500 Index settled at 2488.83, up 21.13 or +0.80%. The blue chip Dow Jones Industrial Average closed at 23138.82, up 260.37 or +1.06% and the tech-based NASDAQ Composite finished at 6579.49, up 25.13 or +0.35%.

Although it’s too early to say the indexes have reached bottom, the fact that buyers are coming in on the dips is impressive. The rally on Wednesday was likely fueled by short-covering, but Thursday’s rally was probably supported by buyers.

Investors were disappointed early in the session due to the lack of follow-through to the upside following Wednesday’s strong gains. This led to sellers to erase nearly 60 percent of the previous session’s gains. However, one has to remember that there are nervous investors out there and they are afraid to buy strength. Especially since the markets are in a downtrend and just about every rally has been sold throughout December. Furthermore, the major indexes had just entered a bear market on Tuesday.

So as they say, “when there’s blood on the streets, it’s time to buy.” Although reluctant to buy strength, investors weren’t shy about buying the dip and it paid off. Investors may continue to be afraid to buy strength on Friday because the fundamental picture is still gloomy. Therefore, we could see an early high.

Since the rally is going against the short-term trend, we’re likely to see selling as the markets approach short-term resistance areas. Furthermore, since buyers came in on weakness on Thursday, they’ll probably do it again until the fundamentals get cleaned up. Only when the fundamentals line up with the chart pattern will investors chase this market higher. Until then, we’re likely to continue to see selling on the rallies and buying on the dips until the pattern is broken.

U.S. Stocks Tumble Amid Renewed US -China Tensions

The major U.S. stock indexes are trading sharply lower shortly after the mid-session. The markets have given back more than half of yesterday’s stellar gains. Traders are blaming renewed tensions between the United States and China for the selling pressure. The price action also indicates that yesterday’s rally was likely fueled by short-covering related to the thin post-holiday trading conditions.

In the cash market at 1918 GMT, the benchmark S&P 500 Index is trading 2409.05, down 58.65 or -2.21%. The blue chip Dow Jones Industrial Average is at 22367.51, down 510.94 or -2.08% and the technology based NASDAQ Composite is at 6363.84, down 190.52 or -2.62%.

U.S.-China Relations at Forefront

The markets opened the session lower on profit-taking, but selling began to accelerate after Reuters reported, citing three sources familiar with the situation, that President Donald Trump is considering an executive order to ban U.S. companies from using equipment build by Chinese firms Huawei and ZTE.

This news encouraged investors to dump stocks as it comes at a time when the two economic powerhouses are trying to strike a permanent trade deal. Investors may feel that this move could prevent the countries from reaching a trade agreement before the 90-day grace period for reaching a deal expires on March 1.

Lingering Uncertainties Including Government Shutdown

The wicked price action this week is being driven by many uncertainties that could linger for weeks or months.

One such uncertainty is the partial government shutdown. On Thursday, President Donald Trump scolded Democrats over his proposed border wall as the crisis carried into its sixth day. According to law, lawmakers will get 24 hours’ notice before any vote on a deal to end the shutdown, meaning a vote could not come before Friday at this point.

As of mid-afternoon Thursday, the White House and congressional leaders still appear far from ending the stalemate even as hundreds of federal workers face furloughs or temporarily work without pay. It’s been reported that employees not working are using vacation time to continue being paid during the break.

Stock Market Price Action Reflects Lack of Confidence in Government

While the headlines continue to place blame on Trump and the Fed, I think that investors are responding to the fact that with a split Congress, President Trump will not be able to fulfill his economic plans. Furthermore, there may be no major economic bills passed over the next two years before the next election. This likely means the economy will stagnate. Investors discounted future events by driving stocks sharply higher since November 2016, now they may be discounting an economic slowdown or a recession.

Politics in Spotlight: Trump Discusses Firing Powell, Failed Spending Bill Shuts Down Government

The U.S. government was in the spotlight last with reports ranging from a one-sided spat between President Trump and U.S. Federal Reserve Chairman Jerome Powell to the shutting down of the U.S. government.

Questions were raised last week about the Federal Reserve’s role in the economy and government. Specifically, investors wanted to know why the Fed was working against President Trump’s plans to grow the economy.

According to the Federal Reserve’s website (www.federalreserve.gov), “the Federal Reserve is an independent agency but one that is ultimately accountable to the public and the Congress. The Congress established maximum employment and stable prices (inflation) as the key macroeconomic objectives of the Federal Reserve in its conduct of monetary policy. The Congress also structured the Federal Reserve to ensure that its monetary policy decisions focus on achieving these long-run goals and do not become subject to political pressures that could lead to undesirable outcomes.”

Essentially, the Fed is trying to maximize employment, which means maintaining a 5 percent or lower unemployment rate, while holding consumer inflation at about 2 percent. At this time, the Fed is close to achieving these goals with the unemployment rate at 3.7% and inflation hovering about 1.9%.

The Fed’s job is not to maximize values in the stock market or individuals’ retirement accounts although its decisions can influence both. However, in issuing its monetary policy statements, it often mentions its concerns about stock market volatility. During times of heightened volatility and economic uncertainty, the Fed tries to take action that does not sound too alarmist about the economy or too unconcerned about deteriorating financial conditions.

Trump Scolds Fed Chair Jerome Powell, Discusses Firing Him

Congress specifically set up the Federal Reserve to “not become subject to political pressures that could lead to undesirable outcome.” Try to tell that to President Trump.

Trump knows that the American people vote with their wallets and their retirement accounts. He based his entire campaign on the slogan “Make America Great Again”. Stock market investors have bought into his ideas since he was elected on November 9, 2016. Perhaps in reaction to his economic policies and tax cuts, he helped drive unemployment to near 50 year lows and the stock market to all-time highs. Since the all-time highs were reached in October, however, the stock market has taken back nearly 50% of the gains from election night.

Trump has been criticizing Fed Chair Powell since mid-July even telling the Washington Post on November 27 he’s “not even a little bit happy with my selection of Jay”. On what threatens the U.S. economy, Trump added, “I think the Fed is a much bigger problem than China.”

On December 11, Trump told Reuters “I think it would be foolish” for the Fed to raise interest rates. “But what can I say?” he said. “You have to understand, we’re fighting some trade battles and we’re winning. But I need accommodation too.”

He called Powell a “good man,” but added that “he’s trying to do what he thinks is best. I disagree with him I think he’s being too aggressive, far too aggressive, actually far too aggressive.”

On December 17, Trump tweeted:  “It is incredible that with a very strong dollar and virtually no inflation, the outside world blowing up around us, Paris is burning and China way down, the Fed is even considering yet another interest rate hike. Take the Victory!”

Finally, on December 18, Trump tweeted again:  “I hope the people over at the Fed will read today’s Wall Street Journal Editorial before they make yet another mistake. Also don’t let the market become any more illiquid that it already is. Stop with the 50 B’s. Feel the market, don’t just go by meaningless numbers. Good luck!”

Bloomberg reported on Saturday that U.S. President Donald Trump has discussed firing Powell. However, this isn’t going to happen because the firing of Powell would be seen as undermining the central bank’s independence from the administration.

U.S. Government Shutdown

The federal government partially shut down at midnight on Friday, hours after Congress failed to pass a spending bill that included $5 billion in funds for a wall on the U.S.-Mexican border.

This has happened before and it’s likely to happen again. Due do the heightened volatility and the thin-holiday trading conditions we could see some exaggerated moves in the markets but it’s not likely to become a major concern until the shutdown extends well past January 3, the day Congress is set to return from its Christmas break. Until then, there is likely to be a lot of blame being tossed around, but like Trump said two weeks ago, “I am proud to shut down the government for border security.”  Furthermore, Trump also said “he’ll own it.”

Report: Investors Moving Money from Stocks to Bonds on Global Economic Growth Concerns

U.S. Treasury yields are rising for a second session after Wednesday’ spike to their highest level since early February. The move is helping to breathe a little life into the beat-up U.S. Dollar. At the same time, it could be an early sign that the worst of the selling in the U.S. equity markets may be over for the week.

At 0643 GMT, March 10-year U.S. Treasury note futures are trading 120’30, down 0.04 or -0.10%. On Wednesday, the futures contract spiked to 121’13.5 before settling at 121’05.5. Futures markets move inverse to yields.

On Thursday, the March 30-year U.S. Treasury bond futures contract jumped to 146’00 before settling lower at 144’11. A closing price reversal top chart pattern was formed on the move, which suggests the selling may be greater than the buying at current price levels.

Investors Fleeing Stocks and Buying Bonds

Earlier in the week, a survey of fund managers released on Tuesday showed investors are fleeing stocks and buying bonds in record numbers amid the global sell-off in equities.

“Investors are approaching extreme bearishness. This month’s survey [found] the biggest ever one-month rotation into the asset class” of bonds, Bank of America Merrill Lynch said in the survey. The research is one of the most widely followed surveys of investors on Wall Street.

The report also showed that more than half of investors expect global economic growth to weaken over the next year. That’s “the worst outlook on the global economy since October 2008,” the survey said.

MoM PPT CHG in Investor Positioning

Furthermore, investors cited a trade war as the biggest concern for the seventh consecutive month. Finally, worsening economic conditions in China was another top risk.

As far as individual stocks are concerned the survey said “For the first time in nearly a year, the FAANG trade ‘is no longer the most crowded trade’ by investors. With the five FAANG stocks – Facebook, Amazon, Apple, Netflix and Google-parent Alphabet – currently in or near bear markets, investors are seeking shelter in the safe-haven U.S. Dollar, as well as shorting emerging markets.

U.S. Dollar Treading Water

Although the U.S. Dollar is inching higher on Friday against a basket of currencies, gains are likely to be capped by year-end positioning, heightened volatility in the financial markets, a collapse in oil prices and a threat of a U.S. government shutdown.

U.S. Dollar Index has been sliding all week with selling pressure driven by rising risks to global growth. Furthermore, the steep drop in crude oil prices is emitting a strong disinflationary signal to the financial markets. This is contributing to the plunge in U.S. Treasury yields which is helping to make the U.S. Dollar a less-attractive investment.

House Passes Spending Bill, but Government Shutdown Still Likely

In breaking news, the U.S. House of Representatives voted late Thursday to advance a spending bill with money for President Donald Trump’s proposed border wall. However, the bill which includes $5 billion for the wall between the United States and Mexico is not likely to pass the Senate, increasing the odds of a government shutdown after the midnight Friday deadline.

A government shutdown would be the third this year. It would likely last through Christmas and into the new year, at least until Democrats take control of the House on January 3.

Fed Recap

The Fed raised its benchmark interest rate on Wednesday for the fourth time this year, but forecast fewer rate hikes next year and signaled its tightening cycle is nearing an end in the face of financial market volatility and slowing global growth.

In doing so, the central bank said “the labor market has continued to strengthen,” and described job gains as having been “strong, on average, in recent months.”

Furthermore, the Fed is likely to be more data dependent in 2019 as it decides if or when it will raise rates. Nothing is set in stone so labor market reports will become more important. These include the monthly U.S. Non-Farm Payrolls report and the weekly unemployment claims.

Weekly Unemployment Claims

The Labor Market said on Thursday that initial claims for state unemployment benefits increased 8,000 to a seasonally adjusted 214,000 for the week ended December 15. The figure remained near a 49-year low last week, suggesting underlying strength in the labor market and broader economy.

Claims had dropped to 206,000 in the prior week, close to the 202,000 reached in mid-September, which was the lowest level since December 1969. Economists had forecast claims increasing to 216,000 in the latest week.

Furthermore, the four-week moving average of initial claims, fell 2,750 to 222,000 last week. During the week-ended November 24, investors were shaken a little when weekly filings jumped to an eight-month high of 235,000.

Non-Farm Payrolls Impact

Since the Fed is basing its interest rate decisions primarily on the labor market and inflation, it’s not too early to think about the January 4 Non-Farm Payrolls report for December.

Last week’s jobless claims data covered the survey period for the non-farm payrolls component of December’s employment report. Total claims fell 11,000 between November and December survey weeks, suggesting some improvement in job growth this month.

In the last Non-Farm Payrolls report, the unemployment rate was near a 49-year low of 3.7 percent, not too far from the Fed’s forecast of 3.5 percent by the end of 2019. If the labor market continues to strengthen, the Fed is more likely to stick with its current tightening policy.

Federal Reserve Officials Forecast Two Rate Hikes Next Year

The U.S. Federal Reserve on Wednesday raised its benchmark interest rate 25-basis points but reduced its projections for future rate increases. The decisions fueled a volatile response in the markets as expected with the Dow Jones Industrial Average falling as much as 400 points, wiping out an earlier 380 point gain.

Long-term U.S. government debt yields also fell sharply with the yield on the 30-year Treasury falling eight basis points to below 3 percent, while the yield on the 10-year Treasury dropped seven basis points to 2.7479 percent.

The drop in rates also drove the U.S. Dollar lower but the greenback has since come off its lows. The weaker U.S. Dollar triggered a spike to the upside in dollar-denominated gold.

The Fed raised interest rates, as expected, while acknowledging the impact of ongoing market volatility and potential weaker global economic growth. The central bank moved the target range for its benchmark funds rate to 2.25 percent to 2.5 percent.

Central bank officials now project two rate hikes next year, which is a reduction but still ahead of current market pricing of no additional moves next year.

In its monetary policy statement, the central bank said the U.S. economy has been growing at a strong rate and the job market has continued to improve. It also noted that “some” further gradual rate hikes would be needed, as subtle change that hinted it was preparing to stop raising borrowing costs.

The language in its monetary policy statement was not entirely dovish, or an actual easing of its outlook for rates. The Federal Open Market Committee continued to include a statement that more rate hikes would be appropriate, though it did soften the tone a bit.

“The Committee judges that some further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective over the medium term,” the statement said.

The FOMC also lowered its projections both for GDP and inflation. Additionally, it also lowered its outlook for the long-run funds rate, from 3 percent in the September forecast to 2.8 percent this month. The 2019 estimate declined to 2.9 percent from 3.1 percent and both 2020 and 2021 dropped to 3.1 percent from 3.4 percent.

Expect Two-Sided Volatility as Fed Chair Powell Takes the Hot Seat

The most widely watched event on Wednesday in the financial markets will be the monetary policy decision by the U.S. Federal Reserve. The central bank is widely expected to raise its benchmark interest rate for a fourth time this year by 25 basis points, bringing it to 2.50%. That being said, traders aren’t too concerned about this move because it has been priced into the markets for several weeks.

Although it would be a surprise if the Federal Open Market Committee decided to pause their rate hikes, the real question investors are asking is what message will the Fed policymakers convey about the path of interest rates moving forward. That answer is likely to be revealed in their dot projections.

Will the FOMC members lower the dot projection from three rate hikes to two in 2019, or will they even take a more dovish stance?

So as an investor, the real focus should not be on the December rate hike, but on what the outlook for 2019 and 2020 looks like.

If the Fed does decide to pause in December then initially, Treasury yields should plunge, taking the U.S. Dollar with it. The move should also fuel a massive stock market rally.

After that first move, stocks could drop suddenly because the message by the Fed will also indicate the central bank sees more trouble ahead for the economy.

How Will Fed Chairman Jerome Powell Squirm Out of This Situation?

Fed Chairman Jerome Powell will be in the hot seat following the Fed’s decisions and the presentation of the new dot projections. Powell’s remarks will be watched carefully because he created this situation and he has to find a way to get out of it.

I think most analysts agree that an overly hawkish Powell set up the stock market for the start of the steep declines in early October. Since then he really hasn’t done much to calm the nerves of investors, other than to say the Fed is likely to take a “wait and see” approach to future rate hikes and that they will be data dependent.

I don’t think that Powell will say he made a mistake with his overly hawkish tone. After all, he was looking at the inflation and growth numbers available at that time. Furthermore, very few predicted the steep plunge in crude oil prices that have squashed inflation fears.

I think that Powell will acknowledge that inflation has been tempered and the global economy has weakened. And this is why the Fed will pause future rate hikes. I think that Powell will still say the U.S. economy is strong, citing the job market and higher wages. However, he will say that the weakening global economy could put pressure on U.S. economic growth, hinting that it could bend a little, but not break.

Furthermore, I would be surprised if he talked directly about stock market volatility because I think the Fed believes that although stock prices have fallen from their highs, the selling pressure has been orderly.

Dovish RBA Minutes Suggest Policymakers Somewhat Less Confident About Economy

The Australian Dollar is holding steady on Tuesday following the release of the Reserve Bank of Australia’s (RBA) December meeting minutes. In its minutes, the RBA reiterated its growth forecasts, but policymakers expressed concerns over a housing market correction and slowdown in consumption.

In the minutes, the RBA board restated that the next move in interest rates was more likely to be up than down, but said there was no strong case for a near-term adjustment in the cash rate, which remains at a historical low of 1.5 percent.

“The current stance of monetary policy would continue to support economic growth and allow for further gradual progress to be made in reducing the unemployment rate and returning inflation towards the midpoint of the target,” the RBA said.

“Members assessed that it would be appropriate to hold the cash rate steady and for the bank to be a source of stability and confidence while this progress unfolds.”

The RBA also noted the downside risk to global inflation due to oil price declines and said the pace of the Chinese economy was “difficult to gauge”.

Housing Correction and Consumption Slowdown Are Key Economic Risks

While most of the content of the minutes was widely anticipated, the Reserve Bank did warn that falling household consumption, fueled by declining real estate values and high debt levels is a key source of uncertainty for the Australian economy.

In the minutes, RBA policymakers noted evolving headwinds as “this combination of factors posed downside risks”.

Australia’s central bankers also noted that housing markets in Sydney and Melbourne had continued to ease from record-high values and that lending had tightened as a result of the revelations from the banking royal commission.

“Lending to investors had remained very weak and growth in lending to owner-occupiers has continued to ease…credit conditions were tighter than they have been for some time,” the RBA wrote in its minutes.

“The focus on responsible lending obligations in response to the royal commission … was likely to have reduced some lenders’ appetite for lending to both households and small businesses.”

Westpac Responds to Minutes

Westpac said “sentiment in these minutes is somewhat less confident about the Australian economy than we have seen in previous minutes, although the outlook for higher rates is once again confirmed.”

Westpac also said “the Bank cannot be described as having moved to a ‘neutral’ bias.

Westpac went on to say, “However, taking into account the attention given to the credit; housing, consumer and external risks”, the minutes are dovish.

As far as the RBA’s benchmark interest rate is concerned, “Westpac has consistently called the cash rate on hold since the August 2016 rate cut … Markets are now closely priced to our current view that rates will be on hold in 2019 and 2020.”

Westpac concluded its assessment of the minutes by saying, “However, traders will want to price-in some scenario for “rates activity”. These minutes are more likely to encourage them to price-in lower rates than the alternative.”

Defiant Xi Jinping Blows Chance to Make Major Announcement on US-China Trade Relations

The major Asian stock indexes finished lower and U.S. stock futures indexes retreated from their session highs on Tuesday as Chinese President Xi Jinping failed to deliver anything positive in his much-anticipated speech at the 40th anniversary of the country’s economic reforms. His speech actually leaned toward the defiant side, raising questions as to whether current U.S.-China trade negotiations will end with a deal before the March 1 deadline.

Defiant Tone

In his speech, Xi Jinping stood up to international calls for changes to his country’s economy by stating, “No one is in a position to dictate to the Chinese people what should or should not be done,” Xi said in Mandarin Chinese during his speech, according to an official translation broadcast through state media.

Xi Calls for China to “Stay the Course”

“What to reform and how to go about the reform must be consistent with the overarching goal of improving and developing the system of Socialism with Chinese Characteristics and modernizing China’s system and capacity for governance,” the Chinese leader added. “We will resolutely reform what should and can be reformed, and make no change where there should and cannot be any reform.”

Commemorates the 40th Anniversary of China’s “Reform and Opening Up”

“The past 40 years eloquently prove that the path, theory, system and the culture of Socialism with Chinese Characteristics pioneered in the wake of the Third Plenary session of the 11th (Communist Party of China) Central Committee by the Chinese people of all ethnic groups rallying under the leadership of the CPC are completely correct, and that CPC theory line and policy that have since taken shape are completely correct,” Xi said.

“The past 40 years eloquently prove that China’s development provides a successful experience and offers a bright prospect for other developing countries as they strive for marketization,” he added.

No Offer of Fresh Commitments to Open or Stimulate Trade

President Xi Jinping offered no fresh commitments to open or stimulate China’s economy in a keynote speech, to the disappointment of investors. Global equity markets slumped after the Chinese leader made no mention of new initiatives. That contrasted with recent news about lowering automobile tariffs and purchasing U.S. soybeans.

Time is Running Out…

Some are saying that Xi Jinping may be saving his biggest pronouncements for negotiations with the U.S. on trade. However, investors would really like to see Xi speed up restructuring of the economy. This could have significant consequences for whether the U.S. reaches a trade deal with China by the end of its 90-day tariff ceasefire.

In some eyes, Xi Jinping may have blown a great opportunity to change the direction of China’s economy and industrial policies. By not making any major new announcements, the odds of an escalation of the tariff fight at the end of the 90-day negotiation period just increased.

This Week’s Fed Meeting: Pressure on Powell to Sound Dovish, but Not Too Dovish

This week marks a pivotal period for U.S. Federal Reserve Policy. While the Fed is widely expected to raise it benchmark interest rates Wednesday by 25 basis points, traders are more likely to react to the comments of Fed Chairman Jerome Powell. The Bank of Japan is also expected to make an interest rate decision. It should leave its key short-term rate unchanged. The Bank of England is also expected to keep rates on hold.

Economic data releases will also be at the forefront with Australia set to release its latest data on the Employment Change and the Unemployment Rate. New Zealand Dollar traders will get the opportunity to react to the latest data on quarterly GDP. The week ends with investors paying close attention to U.S. Core Durable Goods Orders and Final GDP for the quarter.

U.S. Federal Reserve

Look for a 25 basis point rate hike from the Fed on Wednesday. As of Friday’s close, the futures market implied traders saw an 82 percent chance the U.S. central bank would increase key short-term rates by a quarter point to 2.25-2.50 percent at its policy meeting on December18-19, up from 79 percent on Thursday, according to CME Group’s FedWatch program.

Ahead of the meeting, investors are expressing concerns about the U.S. economy and whether the Fed would hike further after December. As recent as September, the Fed came out as a little too optimistic about the economy next year. At this meeting, they may come down a little on their assessment of future economic growth.

At its December meeting, the Federal Open Market Committee is expected to tweak its economic forecast. It may also express some concerns over global growth. Fed Chairman Powell is also expected to hold a post-announcement press conference. At the briefing, he could discuss Fed officials’ concerns about the impact of trade wars and possibly financial conditions.

More importantly, the pressure is on Powell to sound dovish, but not too dovish as to raise fears about the strength of the economy. Stock market investors are hoping Powell sounds dovish enough to ease market fears that it is moving too aggressively. If he is able to pull this off then it may spark a rally in the equity markets.

Bank of Japan

Investors aren’t expecting anything new from the Bank of Japan (BOJ). Look for policymakers to leave its benchmark rate unchanged at -0.1%. Japan is also scheduled to release its latest inflation data. The year-on-year rate of inflation of 1.4% hit in November is expected to remain unchanged. This will confirm the central bank’s assessment that despite years of monetary easing, it has not been able to reach its price stability target at 2%.

Bank of England

The Bank of England (BOE) is expected to keep interest rates unchanged at Thursday’s meeting. Policymakers are holding back on raising rates at this meeting because of recent mixed economic data and fears over Brexit.

Recent data shows the UK economy may be losing momentum so a rate hike at this time may curtail economic growth. However, there is a bright spot, strong wage figures suggest inflationary pressures are building in a labor market devoid of spare capacity. The major concern for BOE policymakers is how to handle the Brexit mess. Central bankers may have to sit on their hands until the government can strike a deal with the European Union, or leave the EU without a deal in March.

With Saudi Arabia Preparing to Slash Shipments to U.S. Refiners, Crude May Be One Big Inventory Draw Away from Sparking Rally

It’s been over a week since the OPEC-led group of exporters announced it would trim 1.2 million barrels per day from production starting on January 1. Last week’s consolidation suggests the aggressive selling pressure has subsided, but without a bullish catalyst to shake out some of the weaker short-sellers, the market is going to have a hard time defeating the current bear market.

Although U.S. West Texas Intermediate and international-benchmark Brent crude oil finished lower for the week, February WTI crude oil managed to hold the minor bottom at $50.31, while remaining well-above the main bottom at $49.60. February Brent crude oil held its minor bottom at $58.39 and its main bottom at $57.78.

At the same time, WTI remained well-below its recent minor top at $63.71 and Brent under its last minor top at $63.71.

For the most part, the daily ranges remained tight. However, the widest range occurred on Thursday when the markets recovered from early weakness to post its highest close for the week. Although there was no follow-through to the upside on Friday, I think the price action on Thursday should be looked at more closely because the catalyst behind that move may be what drives prices higher over the near-term.

Prices Fell on Friday on Concerns Over Future Demand

First, let’s look at Friday’s price action. WTI and Brent crude oil futures settled lower on Friday but inside the previous day’s session. Driving the markets lower, or preventing buyers from following-through to the upside were the reports of weaker-than-expected economic data from China and Europe. So basically the selling was fueled by concerns over future demand.

The key phrase here is “future demand”. In other words, the reports didn’t show that crude oil demand had fallen, but based on the numbers, it could fall in the future.

Prices Rose on Thursday on Concerns Over Future Supply

This brings us back to the news from Thursday that drove prices higher. According to Bloomberg, oil prices jumped on December 13 as Saudi Arabia prepared to slash shipments to U.S. refiners in an effort to prevent a price-killing buildup of American stockpiles.

Bloomberg’s report went on to say that the Saudi state-controlled oil company has warned U.S. refiners to brace for a steep drop in cargoes next month, according to people briefed on its plans. Additionally, American refiners have been told to expect lower shipments from Saudi Arabia in January compared with recent months after last week’s OPEC agreement to cut production, according to the people.

Other Potentially Bullish Factors

On Thursday, prices were also supported by a report of a large drop in stockpiles at the U.S. storage hub in Oklahoma, as well as an International Energy Agency (IEA) warning that global supplies may be more fragile than previously thought.

Stockpiles could fall at the storage hub at Cushing, Oklahoma because of lower shipments from Saudi Arabia. Additionally, a report from the IEA said that combined output losses from Iran and Venezuela could reach 900,000 barrels a day during the second quarter of next year, more than doubling the 800,000 barrels OPEC plans to remove from the world markets.

Timing Suggests Bulls Should Win Battle Between Supply and Demand

Saudi Arabia’s plan is pretty clear. Their strategy is to cut exports to the United States in order to prevent a build in U.S. crude oil supply. Since they plan to make their move starting in January, this is likely to have a more immediate effect on prices then predictions of lower “future demand”.

If you’re bullish crude oil then you’re going to have to be patient. It may take a couple of weeks of bigger-than-expected drawdowns in crude oil inventory to spook some of the weaker shorts out of the market.

Furthermore, since the hedge funds are short, all we need to see is a major hedge fund aggressively covering their short positions to fuel the start of a serious rally. This is because of the “Herd Theory”.

Hedge funds don’t like quiet markets. They like volatility. So if we start to see big withdrawals from inventory then this may be the catalyst that starts the next rally.

Former Fed Chairs Speak: Greenspan Sees Economy Slowing, Yellen Worried About High Corporate Debt

In case you missed it, the Ghosts of Christmas Past returned last week, or should I say the Ghosts of Fed Chairs Past returned last week to offer their takes on risks to the economy. Of course I’m speaking about former Fed Chairs Alan Greenspan and Janet Yellen.

Greenspan Sees Slowing Economy

Speaking to FOX Business on December 13, former Federal Reserve Chairman Alan Greenspan said that the U.S. economy is poised to slow down very soon.

“Just wait until the fourth quarter number comes out, it is going to be down around 2.5 percent,” Greenspan said during an exclusive interview with Maria Bartiromo. The number he was speaking about was fourth quarter gross domestic product.

Greenspan went on to say, “We have monthly data which suggests that we are slowing down, we are not going negative, but we are definitely slowing down – the rate of growth as we go into 2019 probably at a 2 to 2.5 percent pace maximum.”

Greenspan’s Issue with GDP

At the end of the third quarter, U.S. GDP was a relatively strong 3.5 percent, according to a revised estimate from the Bureau of Economic Analysis. However, Greenspan indicated he wasn’t concerned about total GDP, but rather gross domestic savings, which consists of savings of the household, private corporate and public sectors. This is the critical factor driving his outlook for the economy.

“Gross domestic savings is the key funding to capital investment in the United States, and as a result we are seeing capital investments slowing down,” he said.

Recession Unlikely

Although in Greenspan’s opinion, a recession is unlikely, he does think the U.S. has entered a period of stagflation with the blame being placed on runaway spending and entitlement programs.

“We are not funding our entitlements and as a result we have this huge deficit – [a] trillion dollar budget deficit,” he said. “You can’t exist with that sort of phenomenon without inflation re-emerging itself.”

Former Fed Chair Janet Yellen Not as Optimistic as Greenspan

Last week, Janet Yellen, speaking at a small event in Washington, said she is worried about the next financial crisis and that her biggest concerns were the potential for reversal of financial safeguards put in place after the last major crisis nearly 10 years ago. Furthermore, she is also worried about growing corporate debt.

“I am worried that we are in a deregulatory mode and I see a lot of pressures building in the system to go further to really weaken fundamental safeguards that were created in Dodd-Frank. We are a decade after the financial crisis so that would be worrisome and wrong to do.”

Yellen’s main concern about a financial crisis is that monetary policy’s traditional short-term interest rate lever is not available to address a new downturn in the economy. She is worried that the Fed may not have the monetary policy tools necessary to fight the next economic crisis.

Yellen Sees High Levels of Corporate Debt an Issue

Yellen expressed concerns over the high levels of corporate debt, saying that the issue is similar to what triggered the financial crisis.

“You had investors that were reaching for yield and wanted to hold securities that they thought were safe, but that had reasonably high yields. There are a lot of investors in this low interest rate environment who are reaching for yield.”

Although Yellen did not see a threat to the banking system, she does think corporations face risks.

“If the economy experiences any kind of negative shock where rates go up more than expected there will be a lot of corporate bankruptcies, a lot of distressed credit crunch a lot of downgrading of loans, a lot of investor losses,” said Yellen.

She went on to say that she is “disturbed” that she does not see regulators having the tools to address this risky form of lending.

U.S. Stock Index Futures Pressured Early on China Economic Data Misses

The major Asian stock indexes are trading lower on Friday after China released a series of weaker-than-expected economic reports. The latest reports showed the world’s second largest economy is under pressure on both the global and domestic front. The weakness also highlights the impact the trade dispute with the U.S. is having on the economy along with the failure of policy efforts designed to stimulate the economy.

At 0437 GMT, Japan’s Nikkei 225 Index is trading 21496.27, down 319.92 or -1.47%. Hong Kong’s Hang Seng Index is at 26159.81, down 364.54 down -1.37%.

Australia’s S&P/ASX 200 is trading 5616.80, down 44.80 or -0.79%. China’s Shanghai Index is at 2619.07, down 14.98 or -0.57%.

China Reports Slew of Economic Misses

China reported that industrial production in November grew 5.4 percent year-on-year, lower than the 5.9 percent forecast. Retail Sales rose 8.1 percent last month, below the 8.8 percent expected. That was the weakest pace since 2003.

Other reports showed Fixed Asset Management rose 5.9% as expected, slightly higher than the 5.7% increase reported last month. The Unemployment Rate fell slightly to 5.8% from 5.9%.

U.S. Equity Markets

U.S. stock index futures are trading lower early Friday, mostly in reaction to the weaker-than-expected economic data from China. The major cash market stock indexes finished mixed on Thursday during a choppy session as investors digested new developments in the ongoing U.S.-China trade dispute.

In the cash market, the benchmark S&P 500 Index settled at 2655.50, up 4.43 or +0.17%. The blue chip Dow Jones Industrial Average finished at 24591.00, up 63.73 or +0.26% and the tech-based NASDAQ Composite closed at 7070.33, down 27.98 or -0.38%.

The markets were primarily supported by a few minor trade related events this week including China’s lowering of tariffs on U.S. automobiles, and a reported buy of at least 500,000 tons of U.S. soybeans. Furthermore, President Trump evened offered to intervene in the Justice Department’s case against Huawei CFO Meng Wanzhou if it would help smooth over U.S.-China trade relations.

In other news, General Electric shares jumped more than 7 percent after J.P. Morgan analyst Stephen Tusa, a longtime bear on the company, upgraded GE. The analyst cited a more “balanced risk reward at current levels.”

U.S. markets are expected to open lower due to the weakness in China, but prices could turnaround if U.S. data is strong enough to ease concerns over a weakening global economy. The most important reports are U.S. Retail Sales and Core Retail Sales. They are expected to come in at 0.1% and 0.2% respectively.

Capacity Utilization is expected to come in at 78.6%. Industrial Production is estimated to have risen 0.3%. Flash Manufacturing PMI is expected to come in at 55.1. Flash Services PMI is expected to remain flat at 54.7. Business Inventories are called 0.6% higher.

European Central Bank Says Good-bye to Quantitative Easing

With last month’s U.S. inflation data in the books, the focus now shifts to the European Central Bank and its monetary policy decision on Thursday. This is the last major central bank meeting before the U.S. Federal Reserve’s interest rate decision, monetary policy statement, economic projections and press conference next Wednesday.

European Central Bank Will Announce the End of Quantitative Easing

The European Central Bank is expected to leave its benchmark interest rate unchanged on Thursday, but more importantly, it is expected to announce the official end of its quantitative easing program. Its QE program was launched in March 2015 and was designed to save the Euro Zone economy from deflationary forces and the residual effects of the European debt crisis.

ECB Quantitative Easing Program Recap

Over almost four years, the ECB has spent 2.6 trillion Euros ($3 trillion), buying up mostly government debt with a little corporate debt, asset-backed securities and covered bonds mixed in for good measure. According to Reuters, the ECB spent about 1.3 million Euros a minute, and about 7,600 Euros for every person in the currency bloc.

The process to end QE in December 2018 began in 2016 when the ECB began reducing the amount of its bond purchases. After hitting a peak of 80 billion Euros a month in 2016, the central bank’s asset purchases have slowly fallen with monthly bond buys at 15 billion Euros in the final quarter of 2018.

During the QE era, the ECB’s balance sheet surged to about 4.65 trillion Euros. That figure is more than double its balance sheet assets since the start of 2015. That figure is second only to the Bank of Japan.

Impact of QE on Euro Zone Economy

The ECB’s QE program was designed to have a positive impact on Euro Zone GDP growth, inflation and wages and lending.

The Euro Zone entered a recession in 2012. With the help of QE, it has slowly recovered while posting an especially strong performance in 2017. However, it has shown signs of weakening of late, hurt by global trade disputes and uncertainty in Italian markets. Despite the presence of these setbacks, the Euro Zone economy is not weak enough to postpone the end of QE.

QE helped the economy stave off the negative effects of deflation, driving headline inflation to within striking distance of the ECB’s 2 percent inflation target. However, core inflation remains well below target.

The good news is that rising wage growth is expected to spill over into higher inflation next year. The latest data showed annual wage growth, at 2.5 percent in the third quarter, was the highest since 2008 and marked the fourth straight quarter of rises.

Finally, the ECB has worked diligently for nearly four years to drive down borrowing costs in order to boost lending. This has helped fuel the economic expansion, but recent data suggests the pace of lending has softened, signaling the Euro Zone’s growth cycle has peaked.

Impact of QE on Euro Zone Financial Markets

Government borrowing costs in Spain, Portugal and Italy hit record lows due to the impact of QE on interest rates. Some yields in Germany even dropped to below zero percent.

With the flood of money into the system after the QE launch, the Euro tumbled. However, the strengthening economy has helped the Euro rise on a trade-weighted basis since 2016.

The stock market picture has been mixed. European markets were rallying before the start of QE, but are now trading well off their peaks hit in 2015. The biggest drag on the stock markets has been the plunge in bank stocks. Banks have been struggling because of the effect of negative interest rates on profit margins.

Moving Forward

Although the major QE bond purchases are ending, the ECB will continue to reinvest funds from maturing bonds accumulated under QE in the debt market for some time. According to the ECB data, monthly reinvestments over the next 12 months will average almost 14 billion Euros, nearly as much as the monthly ECB purchases in the final three months of 2018.

The ending of the QE program does not mean the ECB will immediately start raising interest rates. The ECB currently feels no pressure to raise rates especially since the U.S. Federal Reserve may be preparing to slow down the pace of its own interest rate hikes in 2019.

Furthermore, the market isn’t pricing in any ECB rate hikes in 2019 because investors feel the Euro Zone economy may be slowing.

Stock Market Plunge Indicates Investors Won’t Be Able to Handle Uncertainty Created by Government Shutdown

Yesterday’s heated exchange between President Donald Trump and top Democrats in Congress on live TV officially moved the potential shutdown of the U.S. government later this month to the forefront of concerns for investors, leap-frogging over the U.S.-China trade dispute, which seems to have softened with China preparing to announce a cut in tariffs on automobiles. The event also pushed worries over Fed monetary policy further down the list of concerns.

The proof lies in the dramatic price swings in U.S. equity markets on Tuesday with the major indexes jumping over 1-percent on the news of the potential easing of tariffs then plunging to their lows of the session during the explosive Oval Office confrontation over the funding for the president’s proposed wall along the U.S.-Mexico border and the looming deadline for a spending package to keep the government running.

The highly unusual event even rattled stock market veteran, CNBC expert and director of floor operations for UBS, Art Cashin, who said, “I have been around for not quite 80 years and I have never seen anything like this … and the stupidity to let it go on.” Cashin further added that the televised exchange increases uncertainty around the projects will move forward in a divided government. “It doesn’t look like they’ll get very much done.”

The Set-Up

What was supposed to be a “friendly” discussion between President Trump, House Minority Leader Nancy Pelosi and Senate Minority Leader Chuck Schumer over immigration and government funding, turned into a remarkable argument in front of television cameras. Stocks plunged during the exchange as the spat threatens already delicate talks to keep the government open past a December 21 deadline, when funding for seven government agencies will lapse.

According to NBC News, “Pelosi has said she will not agree to any money for a wall along the Mexican border in a Department of Homeland Security funding bill. She and Schumer planned to offer Trump a deal to pass appropriations bills for six agencies, along with a year-long measure to keep DHS funding at current levels.” Furthermore, “If Trump denied that agreement, the Democrats planned to suggest a yearlong continuing resolution for all unfunded departments.”

What Issues Triggered the Verbal Explosion

At the start of the meeting, President Trump repeatedly touted his proposed border wall. Simply stated, Trump wants $5 billion to fund the wall in a year-end spending package. The Democrats do not want to fund it. Trump repeatedly claimed the work on the wall had already started, but needs funding to finish the product.

Trump then asked Pelosi to speak. Instead of sticking with the topic, she said “the American people recognize we must keep the government open” and warned of a “Trump shutdown”. She also shifted the focus to the votes needed in Congress to fund the government. This changed the momentum of the meeting and the discussion turned into an argument.

Trump implying he doesn’t have the votes to sway Senate Democrats his way said, “No, we don’t have the votes, Nancy,” “I can’t get it passed in the House if it’s not going to pass the Senate.”

As the argument continued over votes, Schumer said:  We do not want to shut down the government.” He also said that the Republicans and Democrats will appropriate money toward border security, but not build a wall as Trump seeks.

Trump then said, “And if it’s not good security, I won’t take it,” adding you can’t have border security without a wall. Pelosi shot back, “That is not true,” citing the need for an “evidence-based” assessment of what works at the border.

After continuing to trade barbs, Trump said, “If we don’t get what we want, one way or the other, whether it’s through you, through military, through anything you want to call, I will shut down the government.”

“We disagree,” Schumer responded.

Trump then said, “I am proud to shut down the government for border security, Chuck. … I will take the mantle. I will be the one to shut it down,” the president said.

In a joint statement after the meeting, Schumer and Pelosi said, “We gave the president two options that would keep the government open. It’s his choice to accept one of those options or shut down the government.”

Market Outlook

The price action on Tuesday indicates that a government shutdown on December 21 will become a key catalyst before the end of the year. The U.S.-China trade negotiations are not expected to yield any fruit until about March 1. Next week, the Fed meets to discuss monetary policy with the market already pricing in a 25 basis point rate hike and possibly announcing a slowdown in future rate hikes.

After the Fed, investors will have to deal with the strong possibility of a government shutdown. With Trump owning the shutdown, it is likely to happen. How long it will last will be the next worry. Remember that investors don’t like uncertainty, so this event is likely to fuel a volatile reaction in the U.S. stock markets.

Dollar Pressured by Weak Economic Data, Concerns Fed Will Soften Monetary Policy

Economic data and U.S. Federal Reserve member comments controlled the price action in the U.S. Dollar last week. Economic data came in on the weak side last week, raising concerns over economic growth. Dovish Fed comments as well a Wall Street Journal report suggested the Fed may be considering the pace of future rate hikes. Geopolitical events and wild stock market swings also led to bouts of heightened volatility.

U.S. Economic Data

While most traders were focusing on Friday’s U.S. Non-Farm Payrolls report and other outside events, a couple of stronger than expected reports slipped through nearly unnoticed. ISM Manufacturing PMI came in at 59.3, better than the 57.5 forecast and 57.7 previous reading. ISM Non-Manufacturing PMI, also beat the forecast, increasing to 60.7 from 60.3. It also beat an estimate of 59.1.

A weaker-than-expected U.S. nonfarm payrolls report setoff volatile reactions in several markets on Friday amid concerns the U.S. Federal Reserve may have to consider curtailing its plans to raise rates aggressively in 2019. The slow job growth suggests that economic growth may be losing steam.

According to the U.S. Labor Department, Nonfarm Payrolls increased by 155,000 for November while the Unemployment Rate again held at 3.7 percent, its lowest level since 1969. Economists were looking for payroll growth of 198,000 and the jobless rate to remain changed. Average hourly earnings rose last month, but the increase didn’t raise fears about an overheating economy. Average hourly earnings rose at a 3.1 percent pace from a year ago. The monthly earnings gain of 0.2 percent fell short of estimates for a 0.3 percent increase. The average work week edged lower by 0.1 hours to 34.4 hours.

Wall Street Journal Report

According to the WSJ, members of the U.S. Federal Reserve are reportedly debating whether to signal a “wait-and-see” approach after a probable hike to the central bank’s benchmark rate at its December meeting. The WSJ said as part of the Fed’s emerging “data dependent” plan, it could chose to pause the regular quarter-point increases to the federal funds rate and not hike in March.

Fed Minutes and Fed Member Remarks

Minutes from the Fed’s November meeting showed that members are wary of the effect trade tensions and corporate debt could have on economic growth, a sign some took to mean that the FOMC could pause regular rate increases in 2019.

U.S. Federal Reserve Vice Chair Richard Clarida made clear in a discussion about inflation on December 3 that he remains more concerned about falling short of the central bank’s percent objective than running above it.

Inverted Yield Curve

The dollar was also pressured by an inverted Treasury yield curve. This is bearish for the dollar because it tends to point toward potential economic trouble ahead.

Australian Dollar, New Zealand Dollar and Japanese Yen

Extreme stock market volatility encouraged investors to dump risky currencies like the Aussie and the Kiwi, while driving up demand for the safe-haven Japanese Yen.

Stocks traded in both directions before settling sharply lower for the week. Helping to underpin equities was the hope the Fed would limit the number of future rate hikes. Concerns over a possible escalation of the trade dispute between the United States and China put a cap on any rallies, and drove the major indexes sharply lower.

Early in the week, debate over the start date of the truce on additional tariffs by the US and China fueled a choppy, two-sided trade. Later in the week, the arrest of the CFO of Huawei, a major Chinese company, triggered an acceleration to the downside as it created more uncertainty over trade negotiations. Demand for risk continued to decline on Friday after the Wall Street Journal reported federal prosecutors are expected to bring charges against Chinese hackers allegedly trying to break into technology service providers in the U.S.

There were no major reports last week from New Zealand and Japan. The downward direction of the NZD/USD and USD/JPY was primarily driven by the weakness in the stock market and lower demand for risk. In Australia, not only was the Aussie pressured by the risk off scenario, but also by a dovish central bank and weak economic data.

The Reserve Bank of Australia extended its record-breaking streak of inaction on rates, holding the official cash rate at 1.5 percent for a 28th consecutive month ahead. The RBA maintained a positive stance on the labor market, citing a pick-up in wages growth last month. However, it cooled its language around trade noting “some signs of a slowdown” and declines in commodity prices.

Australian Retail Sales came in at 0.3% as expected. The previous report was revised down to 0.1%.

The Aussie plunged after GDP came in well-below expectations. This reduced the odds of a sooner than expected rate hike by the RBA. Quarterly GDP came in at 0.3%, missing the 0.6% forecasts. It was also much lower than the previously reported 0.9%.

Will U.S. Jobs Report Signal Loss of Momentum in Labor Market?

U.S. investors had their hands full on Thursday with early session weakness being fueled by the news that Huawei CFO Meng Wanzhous was arrested by Canadian authorities in Vancouver and a late session recovery being triggered by a report which suggested Federal Reserve officials are mulling a new “wait-and-see” stance after their December FOMC meeting, which could signal a slower pace of interest rate hikes in 2019.

However, in between the major events were a slew of U.S. economic reports. And this stream of data is scheduled to continue on Friday.

Challenger Job Cuts:  Is It Signaling an Upcoming Downturn?

The first report of the day was Challenger Job Cuts. It came in at 51.5% versus the previous read of 153.6%. According to the report, the number of planned layoffs announced by U.S.-based employers totaled 53,073 in November.

According to global outplacement and executive coaching firm Challenger, Gray & Christmas, Inc., “Last month’s job cut total is 29.8 percent lower than the 75,644 cuts announced in October and 51.5 percent higher than the 35, 038 cuts announced in the same month last year. So far this year, employers have announced 494,775 cuts, 28 percent higher than the 386,347 announced through this point last year. This is the highest 11-month total since 2015, when 574,888 cuts were tracked through November.”

“Monthly job cut announcements averaged under 35,000 in all of 2017 and just under 44,000 in 2016. In 2018, cuts are averaging nearly 45,000 per month, with the last four months averaging over 55,000. This upward trend is indicative of a potential economic shift and could spell a drawdown,” said Challenger.

“The job market remains strong for the moment, however. The tight labor market and high demand for skilled workers mean most of those who find themselves unemployed have a good chance of finding new positions,” he added.

ADP Non-Farm Employment Change:  Missed Forecast, Previous Month Revised Lower

According to the ADP National Employment Report, U.S. private employers added 179,000 jobs in November, falling slightly below economists’ expectations. Economists surveyed by Reuters had forecast a gain of 195,000 jobs. Also, October private payrolls were revised down to an increase of 225,000 from the previously reported 227,000.

Revised Nonfarm Productivity and Revised Unit Labor Costs:  Rose More than Expected, but Broader Trend Remains Lackluster

The productivity of non-farm workers, measured as the output of goods and services for each hour on the job, increased at a 2.3% seasonally adjusted annual rate in the third quarter, the Labor Department said Thursday.

A gauge of compensation costs, unit labor costs, increased at a 0.9% annual rate in the July-to-September period. That was a downward revision from the initial estimate of a 1.2% increase. Unit labor costs fell at a revised 2.8% pace in the second quarter. Economists surveyed by the Wall Street Journal had forecast the revised third-quarter figures to show a 2.2% increase productivity from the prior quarter, and labor costs to increase at a 1.1% rate.

Weekly Jobless Claims: Four-Week Average at April High

Weekly Unemployment Claims were 231K, higher than the 226K forecast, but lower than the previously reported 235K. Moreover, the four-week moving average of claims rose to its highest level since April, suggesting a loss of momentum in the labor market.

Decline in Factory Orders Offset by Rise in Services PMI

Another sign of a weakening economy was a bigger-than-expected decline in Factory Orders. The previous month was also revised lower.

The most bullish news was the ISM Non-Manufacturing PMI report. It came in at 60.7, higher than the 59.1 estimate and better than the 60.3 previous read.

Something Brewing in Labor Markets

The weaker than expected jobs data as represented by the Challenger Job Cuts report and the Weekly Unemployment Claims report, suggests a loss of momentum in the labor market. This places greater importance on Friday’s U.S. Non-Farm Payrolls report. It is expected to show the economy added 198K jobs in November. Meanwhile, the Unemployment Rate is expected to remain at 3.7%. Average Hourly Earnings are forecast to have risen 0.3%. This number is very important because it will help determine if inflation is rising or falling.

Treasury Yield Plunge Points to Lower Expectations for Inflation

Treasury futures continued to surge on Thursday with the benchmark 10-year Treasury note falling to 2.83 percent as investors flocked to safe-haven assets amid another steep sell-off in the U.S. equity markets on Thursday. The catalysts behind the price action were fear of an escalation of the trade conflict and a possible U.S. economic slowdown.

Additionally, the yield on the 30-year Treasury bond dropped 4 basis points to 3.136 percent. The yield on the 2-year Treasury note sank 6 basis points to 2.752 percent.

The main point of contention for fixed-income investors this week has been a phenomenon known as an inversion in the Treasury yield curve. Yield curves typically slope upward, because an investor expects higher returns as they take on more risk for longer periods of time.

However recently, the spread between the 2-year and 10-year yields has narrowed, while the spread between the 3-year and 5-year yields inverted on Monday. That inversion is what’s making investors nervous because it tends to precede economic downturns.

A recession doesn’t usually occur immediately. Economists warned that it could be few months to two years before the recession shows up in the data. The classic definition of a recession is two consecutive contractions in the quarterly GDP.

The most closely watched sign of a recession will be the inversion of the 2-year Treasury yield and the 10-year Treasury yield. On Thursday, the fear of a recession was alleviated a little after the yield on the 2-year Treasury note fell significantly.

Besides the fear of an escalation of the trade conflict and a possible U.S. economic slowdown, Treasury investors are also paying close attention to inflation data. This is because recently, Fed Chair Jerome Powell and several of his colleagues warned about the economy overheating. They also strongly indicated they were widely in favor of an interest rate hike in December and perhaps as many as three more in 2018 in order to combat the expected surge in inflation.

However, since early October investors buying government debt saw the direction of inflation differently. If you recall, inflation and economic expectations dictate the movement of long-term rates. Investors do this by estimating how much they should be compensated beyond inflation for holding government debt over several years.

On Tuesday, the spread between the 5-year Treasury inflation-protected securities, or TIPS, and the corresponding 5-year Treasury note hit 1.72 percentage points. This is the best estimate of where the market feels inflation is headed. Since it’s down from 2.00 percent in October, it’s easy to conclude that investors are looking for inflation to weaken, which may lead the Fed to abandon a rate hike in December, while adjusting lower the number of expected rate hikes in 2019.

Palladium Hits Record High; Could See Further Upside if Dollar Weakens

You probably weren’t alive when the automobile surpassed the horse and buggy as the main means of transportation, you may not remember when the percentage of homes using cell phones surpassed the number using landlines. However, you should know when palladium prices traded higher than gold prices for the first time in 15 years because that was on Tuesday.

Palladium prices surged to a record on Tuesday with the move fueled by a sustained supply deficit and increased speculative interest for the autocatalyst industrial metal.

Palladium
Weekly March 2019 Palladium

According to analysts, higher prices are being driven by the impact of a tight fundamental market, flat supplies, rising demand and most importantly by huge speculative interest.

Demand is being driven by increased industrial uses. Furthermore, speculators who bet against the rally are covering their positions, getting chased out by aggressive traders willing to buy strength. Additionally, the lease market is tightening and palladium forward contracts are in backwardation. This is a market condition wherein the price of a commodities’ forward or futures contract is trading below the expected spot price at contract maturity.

Palladium is mainly used in emissions-reducing auto catalysts for vehicles. According to reports, reduced auto tariffs from China are boosting demand expectations in an already tight market.

Some analysts are saying that demand for the metal in these pollution control devices has risen rapidly because more individuals are switching from diesel to regular fuel-powered vehicles, amid the plunge in global fuel prices.

At this time, professionals are grabbing all the palladium they can get their hands on, however, there are some short-term risks for speculative investors. But these risks could be overcome if the longer-term shortage forecasts are confirmed.

The short-term risks are technical in nature. Chart-watchers think the rally will run out of steam due to profit-taking at these record levels. They cite technical indicators such as the metal’s 14-day relative strength index (RSI) at an “overbought” level of 77 as one reason why traders should be watching for a short-term price correction.

Over the short-run if bullish speculators can stomach a potentially volatile correction then there may be a payoff later if supply continues to tighten.

According to London-based Metals Focus, Ltd., palladium’s deficit is poised to widen still further to about 1.4 million ounces at the start of the new year. Some analysts are also predicting that as many as 81.5 million automobiles are expected to be sold by the end of 2018 around the world. This is up 2 million from 2017, which supports the steady rise in palladium demand.

In addition to its use in the automotive industry, palladium is also used in electronics, dentistry, jewelry, groundwater treatment, and chemical manufacturing.

We’re not sure if palladium will continue to trade higher than gold, but it is something to note. Both commodities are dollar-denominated so they will benefit from a weaker dollar. The timing may be right for bullish traders because the dollar could weaken if the U.S. Federal Reserve decides to reduce the number of rate hikes in 2019.