Stocks slipped in Europe in early trading as investors took the cue from a chunky pullback on Wall Street after some weaker US data pointed to rising rates starting to have an impact on economic activity. The major bourses tripped around 0.6-0.9% lower in the first hour of trade after the S&P 500 had its worst day in a month and the Dow Jones faded by more than 600pts as investors booked profits following a decent run-up in the first two weeks of January. The S&P 500 lost 1.56% to close at 3,929, its lowest since the middle of December, whilst the Dow shed 1.81% to drop below 33,300. The Nasdaq snapped a 7-day win streak. After a blistering start to the year, it’s not a great surprise that some softer economic data is an excuse to sell. Yields pulled back further, with the US 10yr touching 3.32%, whilst Japan’s benchmark was around 0.4%, some way below the top of the trading range allowed by the Bank of Japan. Some exaggerated dollar weakness yesterday saw the Aussie hit its highest since August, whilst the Kiwi rose to its best since June. EURUSD continues to mark time across the flag formation around the 1.08 handle for now with uncertainty over what course the ECB is going to take rising the more speakers from the central bank say. 

On that topic, ECB president Christine Lagarde speaks today, whilst US unemployment claims, the Philly Fed manufacturing index and a speech from Fed governor Brainard are the highlights later in the session. Norway’s central bank has kept rates unchanged at 2.75 but expects to raise again in March. 

Bad news is bad news  

From inflation to recession: the narrative dance between recession and inflation fears continues with the recessionary forces winning out yesterday in a ‘bad news is bad news’ type of day. US PPI declined by 0.5%, more than the –0.1% expected, seeing the annual rate slow to +6.2%. Manufacturing output confirmed soft PMI surveys as it recorded its largest drop in two years. Retail sales were also lower, declining by 1.1%, the biggest drop in a year. But bad news is not just yet translating into good news as the Fed is not for budging from its agenda just yet. Whilst markets still think the Fed is going to cut later this year, even the most optimistic investors realise it’s not done with hiking yet. Crude prices slumped on the disappointing US data, whilst a surprise jump in US crude stockpiles also weighed on sentiment. Despite some fairly optimistic demand forecasts from the IEA for the year ahead, the stocks build clouds the near-term demand outlook.  

Fed speakers  

Several Federal Reserve speakers were on the wires yesterday. Harker pointed to slower but perhaps longer, saying he expects to “raise rates a few more times this year" though "hikes of 25bp will be appropriate going forward". Logan supports slower pace of hikes but if that eases financial conditions "we can offset the effect by gradually raising rates to a higher level than previously expected". The ever-hawkish Bullard wants rates to get above 5% "as quickly as we can".  

Bullard also talked about China and how reopening could force the Fed to hike for longer as the world’s second largest economy will drive higher commodity prices – a trend already at work. “I’m nervous that will lead to upward pressure on inflation more generally – that’s a risk that we have to factor in when making monetary policy,” said Bullard.  

As I argue in our Watchlist 2023…”a full China reopening could help stave off a global recession by boosting output and demand. However, it could reinforce inflationary dynamics and force the Fed to raise rates more than expected”. 

Netflix earnings preview  

Netflix is due to report its first earnings since the launch of the ad-supported service. 2022 was a challenging year for the company as subscribers bled away and the stock declined sharply in the first six months of the year. However, Q3 saw subscriber growth reasserted and the stock has been making steady progress since the middle of last year, doubling from its trough of last year to trade around $326 as of yesterday. 

Subscriber growth is always a key metric. Management were bullish in their forecasts for the fourth quarter, estimating 4.5m net additions after 2.4m in the third quarter. Going forward, Netflix will not provide guidance on subscriber additions.  Dwindling subscriber growth last year sparked two important changes. First was the crackdown on password sharing; the other was the launch of a free ad-supported platform. We should get an update on how this service is going in the call, but rumours last year suggested it had not been an auspicious start. 

Sterling pares gains  

Cable pushed up further after the bullish MACD signal and the golden cross to 1.24350, its highest since the middle of December. But gains have been pared as risk took a knock in the wake of the US produce price inflation and retail sales figures.  

I think we can see the dollar further running to the downside along with real and nominal rates and gold picking up some bid as a result. Longer term though I would worry about inflation not coming down that fast, labour remaining very tight and the Fed hiking higher and keeping it there for longer than currently anticipated. This should, later in the year, push up real rates again and the dollar with them, whilst weighing on gold.  

So, does gold have further to run?  

A recession is usually good for gold – so does it now have fresh highs to make? Gold has recovered despite the rise in interest rates around the world in 2022. Fears of a recession and stagflation tend to be gold positive, while continued softening in the US dollar would act as a support. The risk lies in the Federal Reserve pushing nominal rates higher and keeping them there for longer, forcing down inflation expectations and driving up real rates and the dollar in the process.  

Real yields have torn higher in the last 12 months, with the 10-yr Treasury Inflation Protected Securities (TIPS) from around –1.0 as recently as March 2022 to +1.70% in November. This move pressured gold from a peak of around $2,070 in March ‘22 to a trough of $1,615. The turn in real yields towards 1.33% since Nov has encouraged a more bullish take on gold and seen the price rally north of $1,900.  

Daily – golden cross recently points to bullish momentum though in the near-term we have seen a slight pullback in the face of the 50% retracement of the 2022 peak-to-trough. 

Weekly candles show strong bullish MACD crossover with the 38.2% retracement of the 2020 peak to the 2022 low now acting as support. 

The dollar (DXY) also peaked last September and has since fallen by more than 10%. In that time gold rallied by around 18%. US real rates clearly have an impact on the USD – the three are intertwined, but it’s clear that a weaker USD as a result of lower real rates in the US has combined to push up gold in the last few months. The question is whether this is a trend – was last autumn’s peak in real rates and the dollar an inflection?  

Can the dollar rebound? In the short term, yes. Markets may have got ahead of themselves. The European Central Bank and Bank of Japan may not be anything like as hawkish as markets had though as recently as December when both made statements that spurred their respective currencies to bounce back.  

Right now the market still thinks the Fed is not going to be tough enough so nominal rates are down and inflation will persist. This is gold positive. The risk to gold prices making fresh highs would be for the Fed to stick to its guns, push rates higher and keep them there longer than the market expects and we see inflation and inflation expectations really start to come down.  

FTSE flaggging  

The FTSE 100 shows clear pull back from the highs, but finds near-term support around the 200-hour moving average., whilst MACD on this hourly chart indicates potential for bullish crossover. The first 23.6% Fib level around 7,740 would be the next support should this level fail. 

Daily – trend line broken, bull flag forming? 

Crude oil – after yesterday’s pullback now testing the 50-day moving average again.