SVET Reports
SVET Markets Weekly Update (December 11–15, 2023)
On Week 50, the FOMC kept interest rates at 5.5% and projected slower rate hikes, boosting the Nasdaq and other major stock indexes to new highs. However, Global PMIs revealed a strong services sector and weaker manufacturing. Meanwhile, BTC and ETH investors exhibited hesitancy, as prices formed either bearish double tops or bullish flag on daily graphs.
On Monday, the Nasdaq rose, continuing its sixth straight weekly gain, as investors turned their attention to the upcoming Fed meeting and inflation data. While optimism remains, higher inflation could impact expectations for rate reductions. In the meantime, BTC and ETH experienced a significant correction, sliding up to 7% due to aggressive profit-taking by traders.
Details
According to NY Fed, consumer inflation expectations for the coming year dropped to 3.4% in November, the lowest since April 2021, continuing a trend of lower inflation. Fuel and rent price growth expectations also eased. Inflation expectations for the next three and five years remained stable at 3% and 2.7% respectively.
Crypto
Government removes two AML provisions related to cryptocurrency regulation. First, US Secretary of the Treasury must collaborate with regulators to establish a risk-focused examination system for crypto in financial institutions. Second, a comprehensive report detailing crypto transactions linked to sanctioned entities is required. Senators Cynthia Lummis, Elizabeth Warren, Kirsten Gillibrand, and Roger Marshall championed those stupid provisions.
Comment
The recent regulatory developments signaling a potential shift in the anti-crypto tide are noteworthy. The removal of two critical provisions related to cryptocurrency anti-money laundering (AML) regulations reflects a dynamic landscape shaped by various factors.
Firstly, as the political season gains momentum, the rift between the GOP and DEM becomes more apparent. The collaboration mandated by the first provision, requiring the US Secretary of the Treasury to work with banking and government regulators to establish a risk-focused examination system for cryptocurrencies within financial institutions, may indicate a recognition of the difficulties of finding common ground in this space.
Secondly, amidst the looming recession, policymakers may be motivated to decrease pressure on private businesses, including those in the crypto sector. Regulatory adjustments could be a strategic move to foster innovation and alleviate burdens on an industry that has shown resilience in the face of economic challenges.
Third, the perception that enough has been done to suppress crypto, particularly through crackdowns on major players like Binance and Ripple, might be influencing a more nuanced approach. The harsh anti-crypto regulations’ push, led by a group of senators with ridiculously uninformed stance on crypto, including Cynthia Lummis, Elizabeth Warren, Kirsten Gillibrand, and Roger Marshall, might be running off steam.
On Tuesday, investors weigh a surprising CPI report and anticipate the Fed’s policy decision. The Nasdaq and other key stocks seesaw amid an unexpected 0.1% rise in consumer prices. Energy is the worst-performing sector due to a drop in oil prices. Tesla and Oracle shares fall due to disappointing earnings and legal challenges, respectively, while Alphabet dips after an antitrust ruling. BTC and ETH continued to adjust as traders take profits.
Details
The annual inflation slowed to 3.1% in November, as energy costs fell (gasoline -8.9%, utilities gas -10.4%, fuel oil -24.8%). Prices for food, shelter, cars, apparel rose slower, but medical care commodities and transportation services rose faster.
The core inflation (excluding food & energy) rose by 0.3% from the previous month, aligning with expectations and slightly up from 0.2%. Highest rises are in shelter — up 0.4%, medical care — 0.6%, and transportation services — 1.1%.
This indicates that, although, Fed’s tightening is affecting the bottoms’ of economy, e.g. consumer credit and mortgage rates which negatively affect the most underprivileged and financially vulnerable members of the society, service prices excluding energy continue to rise, prolonging corporates and elitists inherited privileges.
Crypto
Comment: AI and Web3?
Web3 is the next generation of Internet technologies, and generative AI involves machines creating content intelligently. The challenge is that these technologies have different requirements and integrating them is not straightforward.
Generalization: AI can be used to analyze data and optimize supply chains, while blockchain technology can ensure transparency and security in the supply chain. In the financial services industry, AI and blockchain are being utilized to create more efficient and secure payment systems, detect fraudulent activities, and ensure the security and integrity of transactions. Also, AI models can be embedded in smart contracts executed on a blockchain to automate tasks, resolve disputes, and enhance decision-making processes.
Mismatch between Generative AI and Web3: Generative AI, which usually runs on powerful GPUs, faces a challenge when integrated with Web3, which operates on limited data and computation capabilities. This creates a hurdle in adapting Web3 runtimes to handle the demands of generative AI workloads.
Need for Integration: Despite the challenges, there is a need for Web3 to incorporate generative AI to keep up with Web2 alternatives. The key question is how to achieve this integration effectively.
Solutions:
Text Tools: Generative AI is being leveraged to empower Web3 through applications such as NFTs, blockchain gaming and the metaverse. For example, by implementing Generative AI text tools, it is possible to streamline and innovate dynamic game elements like dialogues and avatars;
NFTs: image and video generation for NFTs;
Autonomous agents: this latest trend in generative AI. These agents are intelligent models capable of reasoning through tasks, formulating plans, and executing them. They have gained attention due to their semi-autonomous nature.
On Wednesday, the Fed held interest rates steady at 5.5% and projected slower rate hikes through 2024–2025, buoying the Nasdaq and other major stock indexes to new highs, including the Dow Jones reaching a record of 37,090. Meanwhile, BTC and ETH also experienced growth, but started to form a bearish double top, raising speculation about “selling the news” among traders.
Details
The Fed maintained the fed funds rate at 5.25%-5.5% for a third meeting in a row. The central bank indicated 75bps cuts in 2024 due to slowing economic growth and job gains. GDP growth is projected at 2.6% for 2023 and 1.4% for 2024, while PCE and core PCE inflation are revised lower for both years. Unemployment is expected to remain at 3.8% for 2023 and 4.1% for 2024. The dot plot shows a drop in the median year-end 2024 federal funds rate projection to 4.6% from 5.1% in September.
In November, producer prices remained stable, as defined by BLS’s PPI, after decreasing 0.4% in the previous month, contrary to predictions of a 0.1% increase. Prices for goods and services stayed the same, with gasoline prices dropping the most (-4.1%). Food prices rose, particularly chicken eggs (58.8%). Within services, traveler accommodation and utility natural gas increased, while automobile retailing margins decreased.
Comments
It becomes evident that the Federal Reserve’s policies, designed ostensibly to balance the negative effects of the free market system, are, in reality, a Placido-pill that sustains aging individuals’ unwarranted powers within the regulated-market system. This sustenance perpetuates a status quo where a select few wield tremendous influence without contributing positively to the overall economy.
a) Regulated-Markets as a Sustaining Pill for Elites: The regulated-markets system, underpinned by the Federal Reserve’s policies, acts as a life-extending elixir for entrenched elites. Instead of fostering a fair and competitive environment, the system provides a cloak for the preservation of power, shielding aging individuals and their families from the natural evolution that should occur in a dynamic society.
b) Ineffectiveness in Influencing Key Economic Indicators: Despite its purported role, the Federal Reserve demonstrates a stark inability to influence critical economic indicators. Stock markets, inflated asset prices, and the costs of major resources and energy remain largely immune to the Fed’s interventions. This lack of influence exposes the institution as an ineffective regulator that fails to curb the excesses of the privileged few.
c) Artificial Suppression of Salary Rises: The Federal Reserve’s policies, rather than promoting economic well-being, artificially suppress salary rises (and, as a result, slow down the service-based economy) a vital factor in improving the livelihoods of the majority. This deliberate suppression hampers the ability of individuals to experience real growth in their standard of living, perpetuating economic inequality and social unrest.
d) Destruction of SME Lending Market: The adverse effects extend to the small and medium enterprises (SMEs), which are the lifeblood of innovation and economic dynamism. The Federal Reserve’s policies contribute to the destruction of the lending market for SMEs, stifling their growth potential and hindering the very source of innovation and job creation that should be driving the economy forward.
e) Selective Impact on Inflation: Remarkably, the major sources of inflation — governments and large corporations — are largely untouched by the Federal Reserve’s interventions. This selective impact raises questions about the institution’s true purpose and its alignment with the interests of the broader society.
f) The Federal Reserve as a Dangerous Economic Weapon: In light of these observations, the Federal Reserve emerges as a dangerous economic weapon wielded by the elite to suppress any rising, technologically driven opposition from the grassroots of society. Its policies serve as a tool for maintaining control indefinitely, irrespective of the risks posed to the stability and progress of our civilization.
The conclusion drawn from this analysis is the urgent and comprehensive reforms are necessary to dismantle this distorted system. Relying on the Federal Reserve as the guardian of economic stability has proven detrimental to the majority and advantageous only to a select few. A paradigm shift towards decentralization, transparency, accountability, and a ultimately, to an equable and fair distribution of economic power is imperative for the prosperity and sustainability of our society.
World Economy
The Shanghai Composite and Shenzhen Component fell by 1.15% and 1.54% respectively, erasing week gains, following a Chinese policy meeting with no clear growth target and focus on domestic demand and comprehensive policies.
In October, the UK’s trade deficit widened to £4.480 billion, the largest in five months, as imports increased by 4.6% and exports rebounded by 0.6% from a one-year low. Imports from the EU rose by 6.1%, driven by increased machinery and transport equipment imports, notably cars from Germany and refined oil from the Netherlands, Denmark, and Sweden. Imports from non-EU countries surged by 10.9%, mainly due to electrical machinery imports from China. Exports to non-EU countries advanced by 8.2%, driven by material manufactures exports, primarily to India. However, exports to the EU fell by 5.8% due to reduced chemicals, material manufactures, food, and live animals exports.
The Bank of Japan’s big manufacturers’ sentiment index rose to 12 in Q4, surpassing the market consensus of 10 and marking the highest level since Q1 2022. Confidence increased across various industries, while large firms plan to raise capital expenditure by 13.5% in the current financial year, higher than forecasts.
The Brazil’s Ibovespa soared 2.4% to close above 129,400, rebounding after two losses. Investors await policy decisions by the Brazilian central bank, expecting an extension of its cutting cycle. Ambev’s stock rose 3.3% after announcing interest on equity distribution, while Petrobras jumped 1.3% as oil prices rebounded.
Argentina’s Merval index hit a record-high as the new government implemented economic reforms, including devaluation, tax hikes, and spending cuts, while maintaining the interest rate and removing capital controls, affecting the domestic currency.
Russia’s GDP grew by 5.5% in Q3 2023 compared to the previous year, matching preliminary estimates and accelerating from the previous quarter. This was the fastest growth since Q2 2021, driven by commodity prices, restored supply chains, a low base year due to the war, and evasion of oil price caps.
The Nigerian NSE-All Share index reached a new record high of 72,279 on December 13th, amidst challenging macroeconomic conditions in Nigeria. Some companies, including Union Homes REITs, SCOA Nigeria, and Access Holdings, experienced notable gains. (The NSE All Share Index, also known as the NGX All Share Index, is a stock market index that tracks the general market movement of all listed equities on the Nigerian Exchange).
Uranium prices surged to over $82 per pound for the first time since January 2008, driven by high demand and supply risks. The US House passed a bill to ban Russian nuclear fuel imports, magnifying supply risks. Fossil fuel volatility and decarbonization goals led countries to extend the life of existing generators and invest in new plants. The optimistic demand outlook aligned with lower nuclear fuel inventories, resulting in large-scale near-term purchasing activity.
Crude oil futures are near low levels (around $69 per barrel) due to supply and demand concerns and skepticism about OPEC+ production cuts. OPEC noted speculators played a major role in the recent decline. Non-OPEC production is expected to expand by 1.4 million bpd, led by offshore start-ups in Latin America and the North Sea, and Canadian oil sands projects. The EIA predicts record-high net exports of US crude oil and petroleum products in 2024, reaching almost 2 million barrels per day.
Comment
The global economic landscape is experiencing a significant transformation, characterized by a series of interconnected developments. China, a long-standing economic powerhouse, is facing challenges that have the potential to reverberate across the global economy. Stagnant productivity and declining domestic sales have led to concerns about deflation and sluggish growth in the world’s second-largest economy. As a result, China’s manufacturing sector is likely to export deflation, impacting global trade and economic dynamics.
Concurrently, there is evidence of a contrasting trend in other regions. The United Kingdom, Japan, and other advanced economies are witnessing a surge in manufacturing exports to Asia, particularly to rapidly expanding economies such as India. This shift is indicative of a broader realignment in global trade patterns, with smaller-economy, relatively peripheral countries emerging as potential beneficiaries.
Furthermore, 3rd world countries such as Brazil, Russia, and Nigeria are experiencing growing stock markets and expanding economies. This trend, coupled with rising commodity prices, particularly for resources like uranium, underscores the potential for smaller economies to capitalize on the changing global economic dynamics. The higher prices of locally produced commodities and the relatively lower prices of imported goods from developed economies, because of the competition among them, have the potential to bolster the internal markets of these countries.
The confluence of these developments reflects a broader narrative of decentralization in the global economy. As traditional economic powerhouses face challenges, smaller economies are presented with opportunities to leverage their comparative advantages. The intensifying competition for global market share is reshaping trade dynamics, with implications for both developed and emerging economies.
On Thursday, major stocks indexes rose, with Nasdaq hovering above the flatline at 2-years highs. Apple increased to ATH of 198.26. Despite the unexpected rise in retail sales and a decline in weekly jobless claims, expectations of a rate cut in March 2024 remain high. Also, the dollar index (DXY) dipped to a post-August low. BTC and ETH rose, still staying within a double top formation on daily graphs.
Details
Retail sales rose unexpectedly by 0.3% in November 2023, outperforming market predictions of a 0.1% fall. This suggests a promising start to the holiday season, with significant increases in various sectors, including, food services and drinking places (1.6%), nonstore retailers (1%), health and personal care (0.9%) and furniture stores (0.9%). However, sales dipped at gas stations and some retail stores.
Unemployment claims dropped to 202K, the lowest in two months and below the expected 220K, with notable declines in New York (-6,581) and Pennsylvania (-4,362). This reflects a tighter labor market, providing the Fed more interest rate flexibility. Continuing claims increased slightly but stayed below expectations.
On Friday, Fed Williams mentioned that rate cuts are not being discussed currently, as the NY Manufacturing Index declined, and the Global PMIs showed a strong services sector and weaker manufacturing. As a result, major stock indexes were directionless, with the Nasdaq fluctuating, slightly in the red. BTC and ETH traders were indecisive, as prices continued to form either bearish double tops or bullish flag on daily graphs.
Details
New York Fed President Williams pushed back against market bets of multiple rate cuts by the central bank next year, driving oil benchmarks to give back gains that were fueled by a dovish Fed outlook. The comments also lifted the greenback, pressuring foreign demand for dollar-denominated commodities.
In December, NY Empire State Manufacturing Index dropped to -14.5, a four-month low, indicating declining business activity in NY. New orders and shipments fell, unfilled orders decreased, and delivery times shortened. Inventories reduced, employment declined moderately, and the average workweek shortened. Input price increases slowed, while selling price increases remained steady. Firms had a slightly more positive outlook but remained subdued. In the country, overall, the industrial production decreased 0.4% YoY with utilities declined 1%, manufacturing — 0.8%, offsetting a 2.3% rise in mining.
In December, the S&P Global Services PMI rose to 51.3 from 50.8, surpassing expectations. The services sector expanded for the 11th consecutive period at the fastest pace since July. New orders increased due to advertising spending, upselling, and looser financial conditions. Employment growth hit a 6-month high, and input costs rose, but output charge inflation cooled.
Comment: Why manufacturing has been more affected by Fed’s high rates than services sector in 2022–2023?
The impact of rising interest rates on manufacturing is evident in the slowdown of factory demand, reduced global demand, and adverse sales developments.
The manufacturing sector is particularly sensitive to interest rate changes as they can lead to reduced investment, increased borrowing costs, and decreased consumer spending on big-ticket items such as cars and homes. Additionally, rising interest rates can make exports more expensive abroad, leading to a slowdown in exports and a stronger dollar, which can further impact the competitiveness of manufacturers in the global market.
On the other hand, the services sector, which includes industries such as finance, insurance, real estate, and transportation, is less affected by interest rate changes as it generally requires lower investment relative to manufacturing and is more focused on domestic demand, which has been more resilient in the face of rising interest rates.
At the same time, manufacturing accounts for only 11% of the U.S. GDP and 8% of direct employment, so the slowdown in it is less impactful compared to the service sector.
On Week 51, traders focuses locally on personal income, PCE price index, Q3 GDP growth, consumer confidence, and durable goods orders, while the UK reports on inflation and retail sales. Japan highlights BOJ interest rate decisions, inflation rates, and foreign trade data. Germany looks at the Ifo Business Climate Index, GFK consumer confidence, and producer inflation figures.