The US economy grew 4.9% in Q3, durable goods orders rose nearly 5% in September, the Federal Reserve’s favorite inflation gauge, the PCE index, came in higher than expected, and personal spending rose 0.7% in the same month.
The only thing that did not rise was personal income. US Treasury Secretary Janet Yellen believes that the latest growth figure is unsustainable and that the strong data – rather than the worsening fiscal outlook – is the reason why US yields are rising. Fortunately, the sell-off in long-term US Treasuries slowed last week. The US 10-year yield peaked at 5% and fell below this psychological level, while the US 2-year yield is testing the 5% level on the downside.
The Fed is expected to leave interest rates unchanged at its meeting this week, after the European Central Bank (ECB) decided not to raise interest rates last week. Expectations for the Fed’s December meeting remain unchanged as well. Appetite for the US dollar remains limited despite strong economic data, while safe-haven flows into gold are gaining momentum as Israel intensifies its ground assault in Gaza, pushing the price of an ounce above $2000 on Friday.
The yellow metal has recently entered overbought territory, but further escalation of tensions in the Middle East should keep appetite strong. The next natural target for gold is near the all-time high of $2080.
In energy, oil prices fell last week and U.S. crude is trading below $85 a barrel this morning. Israel is bombing targets in neighboring countries and sending troops and tanks into northern Gaza, but it is avoiding a massive ground invasion for now, and the expectation of a long battle is keeping appetite for energy investments limited.
Nevertheless, visibility is low and the risk of sudden jumps due to supply disruptions remains high. Oil prices are expected to fluctuate between the $80/90 range. Below $80/bbl, limited supply should keep demand intact, while above $90/bbl, expectations of slowing global demand should keep price pressures in check.
In equities, lack of investor appetite, mixed results from Big Tech companies and disappointing results from Big Oil companies continued to weigh on the S&P500 last week. The index fell in 4 out of 5 sessions and retreated more than 2.50% over the course of last week.
We are now well below the 200 DMA and below the important 38.2% Fibonacci retracement which is near the 4180 level, indicating that the S&P500 has entered the medium-term bearish consolidation zone. And although the RSI indicator is warning of oversold conditions, which may temporarily slow the sell-off, the path is now open for a deeper decline towards the 4050 level, especially if earnings don’t fully satisfy investors.
On the political front, with a new Speaker of the House in the U.S., the odds of a U.S. government shutdown are lower, but there is still a 20-30% chance that the U.S. government will shut down in the next month or so. This could keep appetite for the US dollar limited.
Aside from the Fed, the Bank of Japan (BoJ) and the Bank of England (BoE) will announce their latest policy decisions this week, and both are expected to keep rates unchanged, but the recent spike in Tokyo inflation makes investors very, very uncomfortable with the BoJ’s insistence on its ultra-loose and inappropriate policy. A rise above the 150 level for the USDJPY seems unlikely, as direct intervention from the Japanese authorities is expected to cool any further sell-off.
