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Market Sell-Off & Fed Pivot Hopes

U.S. Stocks closed the week lower, its worst week since September after some late selling into the close. The market was once again volatile, recovering from a sell-off at the open and then the late selling took its toll.  

The market sold off on stronger than expected Producer prices. The producer price index for final demand climbed 0.3% for the third month and was up 7.4% from a year earlier, Labor Department data showed Friday.  

The monthly gains for October and September were revised higher. Looking closer at the numbers the increase in inflation was small, suggesting a slowing down and that was maybe why we saw a recovery after the initial selling. 

At the end of the day, inflation is still a problem and the upcoming Fed meeting weighed on investors.  

The S&P fell 0.7%, The Nasdaq was down 0.7% and the Dow closed down 0.9%. 

U.S. Treasuries endured a bumpy week, with the 10-year yield ending six basis points higher at 3.57%. 

For the week, the Dow Jones average sank 2.7%, the S&P 500 fell 3.3%, and the Nasdaq Composite tumbled 4% 

Here are the closing levels on Friday, 9th December 2022:

 Last Change %Change 
Dow Jones 33,476.46. -305.02. -0.90% 
S&P 500 3,934.38 -29.13. -0.74% 
Nasdaq Comp 11,004.62. -77.38. -0.70% 
US 10Y 3.58%   
VIX 22.83 +0.54 +2.42% 

Is this the start of a realisation that there might not be a Fed pivot next year? Or is it a pivot? If it comes, does it mean the economy is in trouble? 

Investors will read into any scenario in many different ways. We saw a massive rally in November on Fed slow down and pivot hopes. However, bulls are still buying the dips as seen on Friday after stronger-than-expected inflation data.  

Will the buying break at some point? 

On the other hand, S&P failed to hold above its 200-day moving average, indicating a negative technical sign. 

The inversion of the yield curve is at a 40-year high, suggesting a recession is coming. 

The Fed will raise an expected 50 basis points in the next meeting. The terminal rate is expected to be 5% or higher.

So, why have we not made new lows? Again, there is still much money out there looking for a place to invest. Nobody wants to miss out on the next big rally. (FOMO) 

Regardless, I still believe we need a washout of longs, a capitulation, before we can start the journey to making new highs again. 

Perhaps, the acceptance of the Fed will stay higher for longer, and eventually, lead the economy into a recession, will prompt buyers to back off. Otherwise, if they are long and wrong, it could be a painful affair. 

Source: CBOE, Bloomberg 

This commentary is written by James Gomes
James has been in the finance industry for over 30 years and most recently worked for a large U.S. bank for more than 20 years.

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