2023 is just less than three weeks away. What a year for the markets. But hold up. The volatility is not over. This week is JAM PACKED with data.
US data is what we will be focused on but there are tons of CPI inflation data from other parts of the world including Germany, Britain, Sweden, South Africa, and Poland. I would definitely be paying attention to German and British CPI given the last readings. Germany’s inflation in October 2022 was 10.4% and November’s inflation is expected to come in at 10%. In the UK, October’s inflation came in at 9.6%.
On Tuesday December 13th, we will also receive CPI data from the US. Of course this will be important for interest rate expectations… and will be a large talking point the day after.
Most trading eyes and ears will be on the Federal Reserve interest rate decision on Wednesday December 14th. Powell’s press conference will be key, as many believe he will be dovish and possibly even indicate a Fed pivot. But, be careful. The Fed has said the rate of rate hikes are likely going to decrease, but the focus should be on the terminal rate, or where interest rates are going to top.
The Fed has said they will do whatever is necessary to tame inflation, and I believe there is a real chance that interest rates will be heading higher than the current market expectations. This would put pressure on stocks.
But it isn’t just the Federal Reserve on tap this week. We will also have interest rate decisions from the Swiss National Bank, the Bank of England, and the European Central Bank. It will be a volatile week for sure.
What makes the Fed meeting interesting is the current set up in the bond markets.
Short term yields, the 2 year yield, look ready to drop. The key word is ‘look’. We have a head and shoulders reversal pattern developing which is hinting at lower yields. However, we need to see a close below the neckline support at 4.30%.
If we do not get this close, then the 2 year yield can actually continue the uptrend and move higher. It all comes down to Powell.
Readers know that I follow the 10 year yield closely. It has been our tool to predict where stock markets are going. We had a big breakdown at 3.90% confirming a double top pattern. Yields have been dropping. However, certain geopolitical risks have seen yields drop too as money ran into risk off assets. So it is not always about the Fed.
The current set up in the bond markets is very interesting. As things stand right now, the 2 year yield is showing higher interest rates are possible, while the 10 year yield is hinting at recession.
The dollar has been dropping as the markets began pricing in a dovish Fed. We have not hit our first support target zone at the 105 zone. Another leg lower is possible, but the dollar is beginning to range right here at support. Ranges after a downtrend tend to be an exhaustion sign, meaning the current trend may end.
Usually, we have some sort of fundamental event to confirm the technicals. CPI data and the Fed are definitely fundamental data points to move the dollar. The fear here is a hawkish Fed which would see the US dollar continue its long term uptrend by bouncing from this support zone.
107 is the lower high, so I would use this price point as my key level. If we close above 107, the current downtrend is over.
When it comes to the main US stock markets, things aren’t looking the best for bulls. Just personally, these are the type of set ups I have marked down as a short. I see topping patterns, but they have not been confirmed yet.
Markets are holding above their key support zones which I have marked out on the charts above. If we get a daily close below them, the shorts will be triggered.
However I advise caution during Fed week. Especially a Fed week in December and liquidity is drying out. This means we can see volatile moves which will trigger stop losses left and right.
My plan? Wait for those breakdowns on the equity markets IF they occur. If the Fed comes out dovish and the market loves what it, then we shall see markets continue their uptrend and the Santa Clause rally will have some steam to end the year.