Being an active portfolio manager (this is a term I'm going to use in lieu of 'Traders'), macroeconomic data give huge insight into potential forward stock market movement. Contrary to popular belief, many macroeconomic data lead the stock market, but only if you know how to analyze them properly. Lazy analyses such as "Line up, Market Up, Line down Market down" have no place in Nimbus Capital's trading framework. This brings us to the latest data we received yesterday, 18 Jan 2023. The Producer Price Index (PPI) and Retail Sales for Dec 2022. Let's get one thing out of the way. The PPI and Retail Sales are lagging indicators, not leading. Still, the insight into these data will be useful. Macro crash course 101; the PPI is a leading indicator of the Consumer Price Index (CPI), otherwise known as Inflation. However, both are lagging with respect to the Stock Market. PPI is the change in the price of goods sold by manufacturers. These goods are sold to consumers. As such, a falling PPI will lead to a falling CPI.
Yesterday, 18 Jan 2023, we received the following data.
PPI fell Month Over Month by 0.5%
PPI Year over Year went down to 6.2% while the forecast was 6.8%
This is a huge decline in PPI for December 2022, which should be considered excellent news for the stock market. Isn't the Federal Reserve combating inflation? If inflation is down this much, then rate cuts should be coming in, which is bullish for the stock market.
Yet, the S&P500 dived 62.13 points, -1.56%
Tesla was up as high as 3.9% when the market opened, only to close at -2.06%.
In the past six months, the Stock market reacted positively to falling inflation numbers, but things seem to have flipped.
What gives? Falling inflation is only good for the market if the underlying economy is still growing; consumers are still spending. If consumers lose their spending power, businesses will receive lesser profits which will lead to poor corporate earnings.
Poor corporate earnings equate to falling stock prices. We have just entered the 4Q2022 earning season, with Netflix earning's coming out tonight after market hours. What great timing! If inflation falls at such a rapid pace because consumer spending power has deteriorated, then this is not good news. This is a recessionary signal.
This brings us to the Retail Sales numbers.
Both Core and Retail sales dropped 1.1% in December 2022. IN DECEMBER! The most active shopping period!! This is unprecedented but not unexpected. The Tech layoffs in 2022 would have clued us in on this.
The common argument for this "But But... the unemployment rate is at 3.5%, historically low."
I get cancer each time this argument is made.
This misguided shortcut analysis comes from the failure to understand two things.
1) The finer detail of the employment data
2) Unemployment is a symptom of recession, not the cause.
Let's tackle 1) first.
The majority of the employment is coming in from the Service sector, specifically the Leisure and Hospitality sector.
Most of these jobs are blue-collar jobs, while the white-collar folks get sacked left and right. Who do you think contributes more to the economy and the stock market? Who do you think is the one depositing $1mil a year into his trust fund while upgrading his Tesla model every year? Yup, that Goldman Sach Trader. Oh wait.. he got fired last week! Moreover, the Service Sector contracted for the first time in Dec 2022 after 30 consecutive months of growth.
Those job gains are about to disappear soon. Onto 2). Unemployment is a lagging indicator. It is a symptom of recession, not the cause. Saying we will not go into recession because of the low unemployment rate is like saying I will not get covid19 because I'm not coughing. Be serious, guys. Come on.
The unemployment rate is always at its seasonal lowest before a recession hits.
Why are we talking about all these? This is because we have just witnessed the market responding negatively to falling inflation data for the first time since everyone's grandma, dog, and their grandma's dog knew about the inflation problem last year.
This is a shift in market sentiment. The 10 Year Yield also crashed about 18bps to 3.37% from 3.55%.
Investors are locking in the 10-year rates despite short-term rates being higher. If you want to know more about the Yield Curve and Federal Fund Rates, read this article.
This is also the first time we see a significant decline in the stock market along with the 10-year yield. They used to have an inverse relationship.
Sometime in late December 2022, we had a belated Santa rally in the stock market that lasted until last week. Nonsense companies such as Carnival Corp rally along with big names like Amazon, hoping that falling CPI will lead to higher consumer spending and optimistic December sales. Alas, December's Retail sales data showed that things are the opposite.
The rally has no legs to stand on; stocks went up on fugazi and pixies dust. Sellers are coming in!
Wear your PPE, folks!
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