December Report
November was a trend-changing month. FED signaled to slow the pace of rate hikes, EURUSD broke the 1-year downtrend, gold returned to its long-term mean and S&P 500 is preparing for a breakout. But it will all comes to December to validate some of these changes. Federal Reserve, Bank of England, and European Central Bank will revise their economic projections and rate paths.
Macro View
The FOMC meeting is on 14th December. The markets are pricing a %7 chance of another jumbo hike (75 basis points). After Powell’s speech, a 50-basis points hike is almost guaranteed. But the main point won’t be this month’s hike but rather the rate path of 2023. The members’ speeches are contradictory to each other in some areas but almost all of them agree on one thing, more hikes are needed.
The dot plot from the September meeting pointing a median of %4,625 for the rates. The current rate is %4 and with a 50 basis points increase it will be very close to the median. But at the last meeting and the recent speech of the FED chair, Powell, both signaled that the rate peak projection would be updated at the December meeting to the upside. The question is how much?The markets were betting %5 until Powell’s speech. And now, despite the positive jobs report, it fell to %4.9. Members have different ideas about the peak too. Some members suggest %4.75-%5 while some of them suggest over %5. St. Louis Federal Reserve chair Bullard even suggests a minimum %5 and in the bad case, it can go as much as %7.The second key point at this month’s meeting will be the rate path. As seen in the chart above, the markets expect rate decrease as soon as the second or third quarter of 2023. But most of the members said that the high rate will stay for a long time, at least till 2024. FED, just like at Jackson Hole, might want to erase the market pricing of early rate decreases. If not, it will be most dovish. The third key point might be the QT. It was averted from the market’s gaze but Powell, in its recent speech said that FED will stop the QT process at some point when they decide the reserve amount is at an acceptable level. But what this level is and when it can stop is unclear. FED most likely won’t want to speak about it this early but some questions might come at the Q-A part of the meeting.
US midterm elections end with democrats keeping the senate majority while GOP gaining control of the house. It was a little disappointing election for both sides. But now that the republicans control the house the next debt ceiling talks will be most problematic.
Europe’s gas situation turned a lot better than the market participants expected with the help of warmer autumn. With a colder November, stocks fell to %92 but remain well above the ten-year average of %70. This winter, Europe will be under the influence of a third consecutive La Nina weather phenomenon. December was also expected to be colder than average, but the overall winter is expected to be a little calmer than average. If the gas stocks don’t fall too much in December, gas problems might ease more in the coming months.
ECB’s 75 basis point hike chances are falling. The recent inflation numbers announced as lower than expected. ECB doves might use that to push against a jumbo hike. Despite the improving gas situation, recession risk is increasing. On the other hand, the hawks are afraid of a possible increase in inflation expectations. The markets are pricing in favor of the doves right now with only a %21 chance of a jumbo hike.The other main topic in the December meeting will be the QT. A lot of members bring this topic this month and most of them expect the balance sheet reduction to start in the first quarter. Some members even expect to start as soon as January. The amount, speed, and start date of the QT might be discussed this month.
Globally, the outlook remains gloomy. Tightened monetary policies and China’s problems still affect the global outlook. Despite the slowing rate hike expectations from ECB and the FED, policies are a lot tighter than usual. Inflation also affects spending. The good change came from the energy prices in November. Both oil and gas prices are a lot cheaper than the rest of the year. But that could change quickly with any signal of a possible recovery.The PMI data for the US, China, Eurozone, and the UK is below the contraction limit of 50 and the trend is pointing down. In the US, Job losses increase significantly, especially in the technology sector, but the recent report showed that the jobs market is still solid enough. GDP data also revised to the upside.
China is maybe the most problematic one on the list. The covid-19 lockdowns are crippling the economy. The recent loosing of the covid rules caused a huge spike in cases. The vaccinations are still not enough for a full opening and the communist party leaders’ fears of a fatality rate like Taiwan could cause thousands of deaths. While the covid lockdown worries are intensifying, in many cities protests have begun. The protests did not last long for the moment but the situation seems on edge. The other big problem in China is the construction sector. The government will probably increase the support to the sector to ease the economic pain soon.
The expectations from the UK recovery after the political drama lessened with Sunak’s leadership. But the cauldron still emits smoke within the party. Some members of the party criticized Sunak over a high tax, low growth economy. Even Sunak made some moves to counter that. Despite that, the situation might continue to brew because of the lost support of Tory. The monetary policy and the fiscal policy will continue to be the key topics as the UK is nearing a possible recession.
Japan’s monetary policy remains extra loose but that can come to an end in 2023. The new member of the Bank of Japan Naoki Tamura said to Bloomberg that it would be appropriate for the central bank to conduct a review at the right time. The current BOJ chair Kuroda’s term will end in April. The markets expect some changes, but it might even begin while in the term of Kuroda. Yen lost much value this year and it drives the living costs. The GDP outlook for 2023 took a hit too. Japan wants to create a little inflation for years and now CPI has reached to %3.7. But in 2023 it is expected to fall again. Because of that Bank of Japan continues its negative rates and most importantly its yield limit. BOJ’s upper limit for the 10-year government bond yield is being tested since the summer, and lately, more aggressively. The bank had the step up with purchases which led USDJPY to the upside. After the FX interventions, it cooled down a bit. Now with Tamura’s speech the markets are hoping for a change. But this change can come with a big cost. Japan has the highest debt to GDP among all countries. And prime minister Kishida’s latest stimulus will increase the debt further. The increase in borrowing costs could hurt the budget a lot.
Technical View
US 10 -year yield fell from the upper line of the uptrend channel. With the FED’s slightly dovish turn, the bond market took a breather. Now the yield is testing 3.50 support. If it can hold, an upside correction might happen before the FOMC. A downside breakout might lead the yield to the lower line of the channel, 3,21.
Oil prices are still pricing the recession expectations. A lot of price movers will be in effect in December. First OPEC+’s reduce the supply or pass decision, then central banks decisions, and finally EU’s price cap decision for Russian oil. From the technical standpoint, the price makes a flat exit from the downtrend. If $80 support holds, a move to $100 can be expected. However, below $80 can be a dangerous zone for the brent oil bulls.
Precious metals had a very good month in November. The FED’s slowing signs and the dollar index’s massive turn boosted the metal prices. The most upside came from silver with over %20 surges. Palladium was the weakest with a %0.5 decrease.
Since April, ETFs’ gold holdings have reduced by around %12 and it was a very insistent fall. But in November, the down move stopped. With the ETF selling ended, gold is able to recover with the help of the weakening dollar index. The rise of gold reaches over %11 from the November dip.
The archenemy of gold, real yields stopped their huge rise since October. This gives another boost to the upside move of gold. Slowing inflation changes the FED expectations and treasury yields start to fall but the inflation expectation remains flat throughout the month. The long term real yields start to fall from around %1,50. Despite the fall, some real yield–gold models suggest that gold is still too valuable, maybe more than $300. The gap between the expected value and the real value lessened in the past 2 months.
Gold fell below the post covid era’s main support of 1675 in late September and stayed below almost all of October. But with November, the jump begins. One of the key indicators for the direction of gold is the 233-day moving average and the Z-score that shows how much the price deviates from it. 233-day Z-score was flirting with negative 2 standard deviations since summer and like almost any price time series, gold returned to its long term mean with more than a %11 jump. In December, around the 233-day moving average can be followed as the main resistance. If a clear breakout happens, the up move might continue to around 1900. But after the huge jump, a correction to the downside is possible. For downside moves, 1765 and 1675 are the main supports while 1733 – 1700 can create local support or resistance points according to the price level.
One of the good indicators for gold and other precious metals is the gold/silver ratio. When the gold/silver ratio is clearly in favor of silver, most of the time, gold gain value. The ratio was in an uptrend since early 2021, both gold and silver fell the downside pain in that time. Now the trend is broken to the downside. The next possible stop for the ratio is 75. A clear break to the down might be positive but after rising over %20 last month, silver might take a breather which might also slow down the gold’s huge jump.
Silver is now over 22, the main support for the postcovid era until broken in this summer. 23.36 is the next key resistance, Fibonacci %61.8 retracement level. If it holds, silver might want to retest the 22-22.25 zone before deciding to continue its up move or not. If the 23.36 breaks to the up-side, 24 – 24.72 – 27 could be the resistances to follow during this month.
The dollar index fell after FOMC signals the rate hikes will be slowdown soon. After Powell’s speech, a slowdown is expected to start in the December meeting. The turn to the downside started from the upper line of the longterm trend channel and now reached the previous top. 103-104 zone is an ideal place for an upcorrection starting point. If that happens, 107.50 and 100-day moving averages can be good targets (currently at 109.04 and falling). A clear downside breakout however could open the door to 100.
The stock markets continue to recover in November as inflation data slowed in US and Eurozone. Despite the problems in China and rising recession risks, the signal to slow down from the FED also supports the up moves. DAX is the main performer on the list. Dow Jones fair better than Nasdaq and S&P 500. The worst one was Nasdaq with a %3.38 up move. The technology sector growth seems weaker than many other sectors. The earnings reports signal the pain is not over yet and that most job losses come from the technology sector as well. This weakness causes Nasdaq to perform a little worse than its peers.
The S&P 500, reached the upper line of the downtrend channel after making huge gains. Now 4100-4150 zone will be critical. A possible upside breakout might ignite a longterm trend just like after previous downtrends of the S&P 500. But the fundamental side still might not recover enough for that. The direction could be clearer after the FOMC in the middle of the month. Until then, traders should be wary of possible traps. If a clear breakout occurs, the previous top, 4325 could be the next target. For the down moves, 4000 and 3900 are the first supports. Below 3900, bears might start to gain control again. For a possible down signal, the relative momentum index could be followed for additional assistance.
FX crosses felt the falling dollar index in November. EURUSD rose %5.78, GBPUSD was up %6.29. One of the biggest moves came from USDJPY with a %8.20 fall. One of the weakest ones, AUD still rose against the dollar with a huge %5.30. The percentages are huge for standard one month moves. The markets are readying for a trend change. But after these big moves, will a correction come in early December or the news trends rule this month too? This will be the question.
EURUSD, jump big in November after the breakout from the 1-year downtrend channel and passing the 1.0340 resistance. Now a longerterm downtrend will be tested. 1.0625 is an important resistance. If it holds, a down move might begin. For support, 1.0340 – 1.02 – 1.005 can be followed. An upside breakout however could open the doors to 1.08.
After nearly falling to parity, GBPUSD jumped more than %18 in about two months. On the daily chart, a bearish wedge pattern is formed. Up moves might continue for a bit more but unless the Fibonacci %61.8 retracement level, of 1.24 is broken, the probability of a downside correction will increase. 1.20 is the first key support. Below that the lower line of the wedge can be followed as support. Bearish wedges tend to break to the downside but until a downside break happens, the trend is still showing north.
After the two FX interventions, USDJPY started to fall with the help of the falling dollar index and Japan’s rising inflation. The talks that began about reviewing BOJ policy helped the downward momentum. Now, 133 support will be key in the short term. An upside correction could start from there. But the uptrend has broken and there is a shorterterm downtrend in place. As long as it holds, up moves could create selling opportunities. This month, BOJ’s response will be on watch but it is probably early for any major changing step to happen.
