Higher Risks For A Recession

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In his Daily Market Notes report to investors, Louis Navellier wrote:

Powell delivered a big lump of coal to the Santa rally.

Don’t Fight Fed

The Fed not only confirmed that further increases are still in the cards despite slowing inflation, they also raised their terminal rate forecast to past 5% and indicated that they were still more concerned about easing before inflation had been tamed than risking economic damage along the way.

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Powell didn't see a rate cut in 2023, though indicated rate increases would likely be smaller than the 50bps increase put in place yesterday, taking Fed Funds to the highest in 15 years. The soft landing crowd is backpedaling now.

Stocks were very volatile yesterday after Powell spoke, with the S&P falling from 4,053 to 3,965 and then bouncing back to 4,025 and finally settling in at 3,995 at the close. This morning has been all red with the S&P tanking to 3,900 and modestly bouncing a few points.

Not helping things are a few negative economic reports such as retail sales for November being down 0.6% well off of the -0.1% forecast, the Philly manufacturing Index down 13.8 worse than the -10.0 forecast, and the NY Empire State manufacturing Index down 11.2 well below the -1.0 forecast.

Also not helping was the 50 bps increase by the ECB and the comment that the market appears to be underestimating how high-interest rates need to go to break inflation by Christine Legarde the President of the ECB. So we have a slowing economy and increasingly hawkish central bankers. Interest rates have moved modestly today, with the US 10-year down 4bps to 3.45% and the 2yr flat at 4.25%.

Santa Rally Still Possible

The Santa rally is nevertheless not off the table. If we can hold above 3,900 on the S&P, which we bounced right off this morning, the charts say that the bias will remain to the upside by this time next week.

A wild card in the mix is the option expiration coming tomorrow, the biggest in 2 years, which will undoubtedly cause its own volatility, however it might run counter to new order flow and the trends could offset each other somewhat.

Recession Risks

The upshot of the clearly more hawkish central bankers is that risks are higher for a recession, quality earnings are even more valuable, and speculative investments will be under further pressure. Energy still offers solid earnings and a very tight global market with a rebound in China demand and refilling the US strategic reserve waiting in the wings.

Don't fight the Fed is back on the front burner.

Coffee Beans

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