The Federal Reserve’s (Fed's) preferred indicator for reading inflation in the economy is the Personal Consumption Expenditure Index (PCE). The price index is known for capturing inflation (or deflation) across a wide range of consumer expenses and reflecting changes in consumer behavior. Over the last week, we had the YoY, Quarterly, and Monthly prints; depending on how you wish to read them, they can be positive or negative. However, we feel that it provides the basis for the Fed to keep interest rates firm for the time being and ease at the end of the year only if all three align. The US equities continue to shine, trading around record levels. S&P price-earnings ratios remain stubbornly high, but a deeper look into the composition reveals a weaker outlook. More commentators are suggesting this is not the time to buy, but is it the time to sell? We still remain short on the S&P after reducing the position. The hedge against the physical long equity positions remains the play regardless, but should we start to add to the hedge? In Australia, the economy closed out the financial year with equities up 7.5%, which is not a big gain, but given that GDP has only shrunk since June 2023, it’s a punchy result. Crude remains bid even when discussions are afoot concerning a peace deal, which is a concern for the Fed on interest rate policy and potential fuel inflation down the road. This indicates the tightness of global supply.
But first, we will look at the PCE data in the US. The data has provided the Fed and market players with some good discussion points. Generally, the Yearly (print +0% previous +0.3%) and Monthly (print +2.6% previous +2.7%) data looked softer, which aligns with expectations and shows the Fed that interest rates could come down sooner rather than later. However, the quarterly number of +3.4%, when the previous was 1.8%, is disappointing, especially when the previous prints were lower and supported the Fed's policy. Since Q2 2022, the numbers have been softening each month, with Quarter 4 2023 coming in at +1.8%; however, last week’s +3.4% was unexpected. Without reasons as to the spike, it adds an element of confusion to how the Fed can read the economy and one that requires a lot more thought before any movement on interest can be made. The Core rate was also a better bid, which since 1959 has been an average of 3.24%. As a result, we would expect the Fed to sit back on its hands and wait until all three are aligned, which should be reflected in equity valuations.
The S&P continues to hover at record highs, with price-earnings at 22 times. Daily, more commentators are coming out and saying that we are getting into overbought territory. However, the market has been reluctant to sell off, given that price-earnings peaked at 28 times during the Y2K Bubble. Some investors say there is more in this rally. However, the makeup of the current performance differs from that of the Y2K bubble, where earnings were more across the board. For example, of the Mega 7, Apple, Microsoft, and Nvidia have a combined weighting of 29% in the index, and the three have average earnings of 34 times. Then, add Alphabet, Meta, Amazon, and Tesla to the valuations, and the performance of the S&P was mostly on the back of these stocks. The skew in valuations has been the focal point for investment strategies for the last 2 quarters, which have not been doing too well, but perhaps hedging is still the right way to go. A correction is soon on the cards.
In Australia, we have just closed business for the last fiscal year. The equity markets have rallied 7.5% over the last 12 months, which, given the state of growth in the GDP and the downturn in China, is an excellent result. How much of this is a strong lead from the US, and how much is organically grown? Given the state of the GDP for the last 12 months and the state of the Chinese economy, we need to question this performance. We are still waiting for the final quarter; however, it's hard to believe it will be awe-inspiring. Since quarter 4 of 2022, it has only been going backward, and the numbers have not been all that good. Starting at a growth of 0.8% in Q3 2022 and ending at a growth of just 0.1% for the 3rd quarter of the financial year. In addition to this, the economy's performance in China and the current index valuation remain cloudy. Compared with GDP growth, Q3 2022 showed a GDP growth rate of 3.7%, and we are now trading at 1.6%. Hopefully, the green shoots of recovery will spill over from the Chinese economy and into the Australian economy, so we will avoid a recession. This is marked by two negative quarters of negative growth.
On the commodity front, the markets are set for a rally, with the USD needing to break below 105, which, if it does, will help commodities across the board firm. Talk of a ceasefire and a potential peace deal in the Middle East saw an expected sell-off in Oil, which makes sense; however, the losses have been eroded with the market regaining 30% from the lows and sending a message to traders that supply issues remain a key focus. Summertime drive-time demand is fueling a potential deficit, with OPEC+ saying they will continue to curb supply. Palestine is waiting for Israel to reply, so it’s a bit of a waiting game, and hopefully, a resolution will occur soon on this front. Brent is currently trading at US$85.40 with solid support at US$84.50.
What can we expect this week? In the United States, investors' attention will focus on Friday's payroll reports and FOMC minutes. Other important releases include ISM manufacturing and services PMI, JOLTs Job Openings, factory orders, and foreign trade data. In Europe, parliamentary elections in France and the United Kingdom will help shape the direction for equities for the week. In Australia, MoM retail sales due out Friday are perhaps the main focus locally.
On the position front, we reduced our … position in the S+P (…); however, we are looking to reestablish it once we have a high in place and a clearer trend. We are … at … in the ASX SPI and have added at …; at a daily close above …, we will review the position; however, again we are happy to … and will look for a test … this week. We are still … USD/JPY at … and ... We are just below the 38-year low for the Yen at …, so we are keeping a close eye on the currency. We are currently … the AUD/USD (US …), still waiting for it to pop, and AUS/CHF (…), which is now showing a small profit.
Trade Focus:
Fundamentals:
At the beginning of the year, Gold and Silver were preferred investments. We had been long for some time, and then a month ago, we opted to take profits and move to the sidelines…
Technical Analysis:
The technical picture for both commodities looks positive. We can identify support where stops can be placed, and the momentum indicators for both remain supportive. We like the…
Support …
Resistance …
Momentum …
