US stocks rallied after an impressive retail sales report, solid industrial production data, and retail earnings showed the consumer is handling the current pricing increases. All signs are pointing to a very strong holiday season for retailers and that should help keep sending stocks higher. Financial markets are fixated on inflation, but now agree that it can get a little uglier over the next couple of months, before traders get unnerved.
The Nasdaq outperformed as today’s risk-on tone was accompanied by steadying Treasury yields, a boost to Chinese stocks Alibaba Group Holding Ltd (NYSE:BABA) and Baidu Inc (NASDAQ:BIDU), and as Wall Street embraced the EV trade.
The US consumer shrugged off higher prices and opened their pocketbooks in October. Sales at US retail stores surged by a seasonally adjusted 1.7% in October compared with the previous month, higher than the consensus estimate of 1.0%. The jump in online sales is a good sign that holiday shopping will be very strong this season. Everything is being bought as the American consumer spends the leftover stimulus money in their bank accounts.
This retail sales report contradicts last week’s consumer sentiment reading that hit a 10-year low. Complimenting today’s retail sales report was solid earnings from Walmart. The key takeaway from Walmart is that consumers are still very strong as they are both spending and shopping more. Home Depot also posted robust results that show the homeowner is still not done fixing up their home.
Both industrial and manufacturing production readings showed better-than-expected gains in October as companies showed improvement over getting their hands on supplies. The prior month’s report was dragged down by Hurricane Ida, so the improvement will be taken with a grain of salt. If factory output continues to rise in the coming months despite higher energy prices, growth forecasts for 2022 will need to be upgraded.
Crude prices remain very choppy as energy traders await a decision from the Biden administration over an SPR release. It seems the energy market is convinced that even if the US resorts to tapping the strategic petroleum reserve, the benefits would be minimal and yield little benefit to the US consumer.
The oil market deficit seems likely to last a while longer as the Biden administration seems unwilling to ask US shale to increase production. OPEC+ has the oil market right where it wants it and they will now likely benefit with $80 oil at the minimum over the next couple of years.
Gold clearly has a short-term barrier at the $1880 level. Gold prices were unable to get their groove back as a strong dollar emerged after US stocks attempted to make fresh record highs and after another round of hawkish comments from Fed’s Bullard. Bullard noted, “think it behooves the committee to go in a more hawkish direction in the next couple of meetings, so we are managing the risk of inflation appropriately.”
Gold’s bullish trend remains intact but exhaustion from the recent rally could see prices drift towards the $1825 level.
A strong dollar helped Bitcoin take a quick dip below the $60,000 level before stabilizing. Another futures-based Bitcoin ETF started to trade, but that did not really move the needle in attracting new investors. Bitcoin has entered a consolidation phase as investors are in wait-and-see mode to see what happens with inflation. Bitcoin may continue to attract inflation hedges, but if pricing pressures trigger rapid rate hiking action from the Fed, that could trigger a massive wave of risk aversion that would penalize cryptos.
Bitcoin and Ethereum seem poised to finish the year as one of the top performing assets, but if we see Wall Street grow nervous over a policy mistake by the Fed, cryptos would get hammered. Bitcoin’s longer-term outlook is still much higher, but the short-term outlook is cloudy at best.
Article By Edward Moya - OANDA