There was plenty of economic data last week, which, on balance, the equity markets in the US liked. Although the Industrial and Manufacturing data showed negative growth, the Core Inflation data YoY was better than expected at 0.1%. This round of data led investors to believe that the Federal Reserve (Fed) would look to cut rates sooner than expected.  The Dow, S+P and Nasdaq all hit record highs.  However, as the Fed has reiterated, any inflation rate above the target of 2% is still unacceptable, noting in past comments that rates will stay higher until inflation is in check. Investors discounted the Fed's rhetoric, sighting softer Industrial/Manufacturing and Retail Sales as a reason for the Fed to act sooner.  It is a very delicate program the Fed is currently managing, trying to safeguard the economy from any potential shocks whilst inflation remains high and the economy is showing signs of weakening. In China, the PBoC is having a similar experience, albeit at the opposite ends of the spectrum. Recent data suggests the economy is spluttering along with a mixed bag of data, showing that stimulus works in some areas but not others, especially for the man on the street. Industrial production was 6.7% against an expected 5.6% whilst Retail Sales slumped to 2.3% against a forecast 3.5%.  The Labor Government handed down its budget in Australia, and so far, the market is not too disappointed. The handouts continue, underscoring positive sentiment in the market for now. 

But first, let us focus on the US Economy and discuss why our positions in the S+P are underwater and should we hold. The past week has been rich with economic data in the US, and the response from equity markets in the United States has been notably positive. Despite some mixed signals, overall, the market's reaction has been optimistic, driving major indices like the Dow, S&P, and Nasdaq to record highs. This enthusiasm stems from several key data points and the underlying expectations regarding the Federal Reserve's (Fed) monetary policy. 

Core Inflation is one of the most closely watched indicators for Investors. Last week’s YoY, figure came in better than expected at 0.1% better than last month. This figure was particularly significant because inflation is a critical metric for the Fed's policy decisions. The lower-than-expected inflation rate led investors to speculate that the Fed might consider cutting interest rates sooner than previously anticipated. Such a move would be intended to stimulate economic activity by making borrowing cheaper, thereby encouraging spending and investment.

The prospect of lower interest rates is typically bullish for equity markets, as it reduces the cost of capital for companies and can boost corporate profits. This optimism was reflected in the record highs achieved by major indices. However, it is important to note that the Fed has been clear in its communication: any inflation rate above the target of 2% remains unacceptable. The Fed has consistently reiterated its commitment to keeping rates higher until inflation is firmly under control.

But whilst the Core Inflation data provided a glimmer of hope, the Industrial and Manufacturing sectors are painting a less rosy picture. Both sectors showed negative growth, which is concerning because they are crucial components of the economy. Weakness in these areas suggests that there are underlying issues that could dampen economic growth.

Investors, however, seemed to discount these negative signals. They focused instead on the potential for the Fed to ease monetary policy in response to the softer data. This selective optimism highlights the delicate balancing act that the Fed is currently managing. On one hand, it needs to control inflation to maintain economic stability. On the other hand, it must be cautious not to stifle growth, especially when certain sectors are already showing signs of weakness.

Adding to the complexity, Retail Sales data also came in softer than expected. Consumer spending is a critical driver of the US economy, and weaker Retail Sales can signal a slowdown in economic activity. Despite this, the markets remained buoyant, partly because investors believed that the combination of softer economic data and lower inflation would prompt the Fed to act sooner rather than later. 

The Fed's challenge is to navigate these conflicting signals carefully. A premature rate cut could risk reigniting inflation, while delaying too long could exacerbate the slowdown in growth. The current situation underscores the fine line that policymakers must walk to safeguard the economy from potential shocks. As such, we are looking to reduce positions. Regardless of the economy's weakening, the sheer weight of potential optimism caused by lowering interest rates is driving sentiment. 

In the US, investors will closely monitor speeches by several Fed officials, the FOMC meeting minutes, and key economic indicators, including the S&P Manufacturing and Services PMI, durable goods orders, and new and existing home sales. The earnings season is nearing its end, with reports expected from major corporations such as Palo Alto Networks, Lowe’s, Nvidia, PDD Holdings, TJX Companies, Analog Devices, Synopsys, Target, and Intuit.

On the position front, we remain … in the S+P (…, …), the positions were in the money we are looking to reduce and may exit with a loss as we are trading above or trigger point of US... We are … at … in the ASX and have added at … at a close above … we will review the position. We are still … USD/JPY at … and at ... In the other currencies, we are … in AUD/USD at … and AUD/CHF ... Currently longs, we are still … in the AUD/USD (US…) and AUS/CHF (…); we have just entered … positions in Gold (…) and two positions in Silver (US… and …) all metals positions are doing extremely well for us.

Trade Focus:

Fundamentals:

S+P500: Seeing the S+P above 5250 on an economic basis still doesn’t make sense. Given the potential for a weakening economy. This week’s FOMC meeting minutes may help …

Technical Analysis:

Passing through the old high to a new record for the S+P500 calls for concern on … positions as this could lead to a new and higher trading range…

Support              …

Resistance         …

Momentum        …