The impending recession? | 06 January 2023

#SP500:

University of Michigan’s Sentiment Index improved in December, but is still below October levels, as consumers are unsure about the near-term economic landscape. Expected inflation over the next year fell to the lowest since June 2021, consistent with the data that shows inflation is past peak. Long-term inflation expectations fell below 3% again, after inching up the last two months. Labor market conditions appear weakening. Earnings should begin to get more attention this week as reporting season approaches. Seven of 11 S&P 500 sectors are expected to see earnings contract in this coming earnings season, making overall S&P 500 earnings growth unlikely. Only the energy, industrials, real estate, and utilities sectors are expected to show positive growth. U.S. Treasury yields have moved higher across the curve. Front and long-end yields have risen 10 to 20 basis points or 0.10% to 0.20%, respectively, over the last week, likely driven by nagging global inflation, unknown impacts from China reopening, and low trading volume in the Treasury market.

Trading recommendation: range 3750 - 3915.

XAUUSD:

The New York Fed said that its reverse repo facility took in $2.554 trillion in cash from money market funds and other eligible financial firms, besting the prior high-water mark seen on Sept. 30, when inflows totaled $2.426 trillion. The Fed’s reverse repo facility has been very active for some time. After seeing almost no uptake for an extended period, cash began to gravitate toward the central bank in the spring of 2021 and then grew consistently. Daily reverse repo usage has been holding over the $2 trillion mark since June. The reverse repo facility is designed to provide a soft floor for short-term rates and the federal funds target rate, the Fed's main tool to achieve its job and inflation mandates. To set the high end of the range, the Fed also pays deposit taking banks to park cash at the central bank, with its interest rate on reserve balances now standing at 4.4.%.

Trading recommendation: buy 1805 and take profit 1832.

#WTI:

China's zero-COVID restrictions, which were eased only this month, had squashed demand recovery hopes. The world's top oil importer and second-biggest consumer in 2022 posted its first drop in oil demand for years. While China's oil demand is expected to recover in 2023, a recent surge in COVID-19 cases has dimmed hopes of an immediate boost in barrel buying. While a jump in year-end holiday travel and Russia's ban on crude and oil product sales has supported crude, tighter supply will be offset this year by declining fuel consumption due to a deteriorating economic environment.

Trading recommendation: range 78.88 - 82.50