The US economy grew 4.9% in Q3, the durable goods orders rose nearly 5% in September, and the Federal Reserve’s (Fed) favorite inflation gauge, the PCE index, came in higher than expected, as personal spending jumped 0.7% during the same month. The only thing that did not increase was personal income. US Treasury Janet Yellen thinks that the latest growth number is not sustainable and that the strong data – and not the worsening fiscal outlook is the reason that pushes the US yields higher. Happily, though, last week saw the selloff in long-term US sovereign bonds slow down. The US 10-year yield peaked at 5% and fell below this psychological level, the US 2-year yield is testing the 5% level to the downside. The Fed is expected to maintain the interest rates unchanged when it meets this week after the European Central Bank (ECB) decided not to hike its rates last week. The expectation for the December Fed meeting remains a no change as well. Appetite for the US dollar remains limited despite the strong economic data, while safe-haven inflows toward gold gain momentum, as Israel intensified its ground attack in Gaza, pushing the price of an ounce above the $2000 per ounce level on Friday. The yellow metal has recently stepped into the overbought market territory, yet further escalation of tensions in the Middle East should keep appetite strong. The next natural target for gold stands near the $2080 level, the all-time high.
In the energy space, oil prices fell last week, and US crude is exchanged below the $85pb level this morning. Israel bombed targets in neighboring countries and sent troops and tanks into Northern Gaza, but it avoided a massive ground invasion, for now, and the expectation for a long battle keeps its appetite in energy investments limited. This being said, the visibility is low, and there is risk of sudden jumps on supply disruption remains high. Oil prices are expected to fluctuate between the $80/90 range. Below $80pb, the limited supply should keep demand intact, above $90pb, the expectation for waning global demand should keep the price pressure contained.
In equities, the lack of investor appetite, mixed results from Big Tech companies, and disappointing results from the Big Oil companies further weighed on the S&P 500 last week. The index fell in 4 out of 5 sessions and retreated more than 2.50% during the course of last week. We are now well below the 200-DMA and below the major 38.2% Fibonacci retracement, which stands near the 4180 level, and indicates that the S&P 500 has stepped into the medium-term bearish consolidation zone. And even though the RSI indicator warns of oversold market conditions, which could temporarily slow down the equity selloff, the way is now open for a deeper fall toward the 4050 level, especially if the earnings don’t fully satisfy investors.
On the political front, the odds of a US government shut down are lower with a new House Speaker in the US, but the US government is still given around 20-30% probability to stop functioning last month. That could keep the appetite for the US dollar limited.
Besides the Fed, the Bank of Japan (BoJ) and the Bank of England (BoE) will announce their latest policy decisions this week and they are both expected to keep rates unchanged, but the recent jump in Tokyo inflation keeps investors very, very much uncomfortably regarding the BoJ’s insistence about its ultra-loose and inappropriate policy. A rise in the USD/JPY above the 150 level seems little likely with direct intervention expected from Japanese authorities to cool down any further selloff.