SVET Reports

SVET Markets Weekly Update (March 6–10, 2023)

Week 10 was characterized by the slogan ‘Fundamentals against the Fed,’ with Powell pivoting on the spot and threatening markets with longer and heavier rate burdens. Ironically, during the same week, both the banking and political systems sent him early warning messages, delivered by two unlikely companions — Elizabeth Warren and the Silicon Valley Bank. NASDAQ reacted to this situation by sinking another 5 percent (o: 11736, c: 11138). Meanwhile, BTC dropped 11 percent — from 22430 to 19969.

Notable Macroeconomic Updates:

Unemployment Rate (Feb): 3.6 percent (fact), 3.4 (consensus);
Non Farm Payrolls (Feb): 311K (fact), 205K (consensus);
Initial Jobless Claims (Mar/04): 211K (fact), 195K (consensus);
JOLTs Job Openings (Jan): 10.824M (fact), 10.5M (consensus);
IBD/TIPP Economic Optimism: 46.9 (fact), 46 (consensus).
On Monday, traders’ actions were defined by technicals, with the NASDAQ taking a pause at 11.7K (opening: 11736, closing: 11675) after hiking on Thursday and Friday, while BTC continued to slowly drift sideways (opening: 22397, closing: 22393). This cooling down was also attributed to markets anticipating that Powell’s testimonies on Tuesday and Wednesday in Washington D.C. could rattle the feathers of aggressive stock buyers.

As of March 6th, I had no surprises to report on the fundamental side. New orders for manufactured goods in January decreased by $8.9 billion or 1.6 percent to $542.8 billion, in line with the consensus of -1.8 percent, following a 1.7 percent increase in the previous month. Transportation equipment, including commercial aircraft (as assumed), led the decrease with a 13.3 percent downturn to $92.8 billion. On the other hand, food products have increased in seventeen out of the last eighteen months. Overall, however, the goods orders graph remains close to its all-time high of 560B reached in 2014 (compared to $360B in 2020, $320B in 2009, and $300B in 2001).

Powell’s testimony to Congress on Tuesday did not bring relief to markets, as expected. Basically, he said that the pace of rate hikes (currently at 4.5%-4.75%) might be accelerated if needed, that the latest economic data has come in stronger than the Fed previously anticipated, that he still keeps his target at 2%, and that it will take some time to reach that goal. Not necessarily a big day, except probably for Elizabeth Warren, becoming one of the few DEMs to publicly call for the replacement of Powell :)

At the same time, another piece of data released on March 7 suggests that, despite the macroeconomic negativity, consumers remain unreasonably buoyant. The IBD/TIPP Economic Optimism Index rose to 46.9 in March from 45.1 in the previous month, the highest since December 2021. However, the index remains in pessimistic territory for a 19th straight month, with 53 percent of respondents believing that the economy is in a recession (compared to 55% in January and 61% in October).

The NASDAQ acted accordingly, sliding from 11670 at the opening to 11530 at the close (-1.2 percent), with BTC returning to a downward trend and declining from 22363 to 22054 (-1.4).

On Wednesday, Powell continued his testimony to members of the legislature, and the Bureau of Labor Statistics published its January Job Openings report. None of these were aimed at massaging traders’ enthusiasm. Powell reiterated his horror stories, which were already familiar to all of us, and JOLTS came out lower than in the previous month but still larger than what was anticipated by analysts.

The number of openings decreased to 10.8 million from December, compared to market expectations of 10.5 million. The largest cuts occurred in construction (-240,000), food (-204,000), and finance (-100,000). On the other hand, increases were observed in transportation, warehousing, and utilities (+94,000) and in manufacturing (+50,000).

On the opening of NASDAQ (11553), it first reacted to fundamentals by dipping to 11487, but then recovered, driven by technicals, and closed barely in the green at 11576. The BTC dynamics were similar, with an opening of 21989 and a closing of 21992.

On Thursday, traders, confused by Powell’s latest public performance, either played technicals, ignoring fundamentals yet again, or played fundamentals, ignoring the Fed. The NASDAQ jumped from 11,578 to 11,667 on the opening, prompted by the Department of Labor’s weekly jobless claims report. However, then, market actors promptly turned around on the spot, taking 2 percent from the index value and closing at 11,338. BTC’s fall was accelerated by the Silvergate announcement. It plunged much further during the day session, by 7.3 percent (open: 21,703, close: 20,116).

As for the jobless report for the week ending March 4, it showed that initial claims increased by 21K to 211K — the highest weekly uptick since December 2022, which far exceeded market expectations of 195K.

Traders’ bearish activities and Lane’s bank crises completely overshadowed Michael Barr’s message of conciliation to the crypto community delivered in Washington DC. Barr, Biden’s nominee to the FED and former Treasury Under Secretary under Obama who holds a Juris Doctor degree from Yale, stated that “Our goal is to create guardrails, while making room for innovation that can benefit consumers and the financial system more broadly.” Barr has promised to create “a specialized team of experts” to achieve this goal. However, it is unlikely that this will lead Fed Boomers to listen and stop knee-jerking, in my opinion :)

RE: “Supporting Innovation with Guardrails: The Federal Reserve’s Approach to Supervision and Regulation of Banks’ Crypto-related Activities”

On Friday SVB happened which was not at all surprising from the macroeconomic point of view. All banks, especially SMEs, have been highly leveraged since at least the year 2010. As a result, they are burdened by enormous debts which, thanks to Powell, they must now service by paying historically record-high rates. However, they are unable to do so because their clients — companies, especially those in the high-tech industry, to which these small banks have lent money — are experiencing a shortage of revenue due to the artificially triggered recession in the economy.

Powell’s incompetent and politically motivated decision to raise the rates at a record speed has added to this issue. The banks and companies do not have enough time to rearrange their businesses and renegotiate their debts. The situation is compounded by crashing markets, which drag down the banks’ stocks that serve as collateral for loans.

It appears that many traders did not factor this into their trading plans when they wholeheartedly joined the January rally. As a result, indexes reacted by plunging below their 200-day moving averages. The NASDAQ dropped by 1.7 percent (open: 11325, close: 11138), and BTC entered its 20K resistance zone (open: 20184, close: 19969), setting the Fear and Greed Index at 34.

Other macroeconomic news included nonfarm payroll employment rising by 311K in February, while, confusingly, the unemployment rate edged up to 3.6 percent from 3.4 percent in the previous month. Job gains were seen in leisure, retail, and government sectors (who would have doubted that?), while employment declined in information, telecommunications, transportation, and warehousing sectors.

In Week 11, traders are expected to start fidgeting prior to the FOMC meeting on March 21–22. This will be compounded by Tuesday’s Inflation Rate, as well as Wednesday’s PPI and Retail Sales updates.