Mid-Market Update: Strong start fizzled out on Fed worries, Nvidia impresses, Claims suggest labor market is not ready to loosen, Crude rallies post EIA report, Gold weakens, Bitcoin wavers

US stocks initially rallied as traders become confident the Fed’s rate hiking campaign will be over after two or three more rate hikes. Stocks were also getting a boost after Nvidia delivered a robust outlook. Investors likes what they saw from Nvidia as demand for artificial intelligence processors is on the rise. Betting on AI will be a strong play going forward and many traders like how Nvidia has positioned itself.

Stocks are softening on rising fears that the Fed is going to send this economy into recession. Geopolitical risks clearly remain on the table between the US and Russia/China, and that should keep inflation risks elevated over these next few months. Rate traders are coming to agreement that the Fed will raise rates by 25bps in March and May, with a growing chance that will also happen in June.

US Data

The Fed has more work to do.  The Fed minutes support the case for ongoing rate increases and today’s data suggests the economy is clearly slowing down but the labor market remains tight. 

The labor market does not want to loosen. First-time claims for weekly unemployment benefits edged lower from 195,000 to 192,000, below the consensus estimate of 200,000.  Continuing claims decreased from 1.691 million to 1.654 million, well below the 1.70 million estimate. 

Wage pressures won’t be easing anytime soon as weekly claims this year remain below the pre-pandemic average of ~220,000.

The second look at Q4 GDP showed the economy grew 2.7%, lower than the advance reading of 2.9% as personal consumption was significantly lowered from 2.1% to 1.4%.  When you remove trade, government spending, and inventories, final sales to private domestic purchasers posted a 0.1% rise, the weakest reading since the start of the pandemic.

With the Fed likely to deliver a few more rate increases, recession odds should be surging here.  Disinflation trends will get their groove back over the summer and that will allow the Fed to back off from this tightening campaign. 

Oil

Oil prices are higher as the short-term crude demand outlook appears to be improving, while stockpiles continue to rise. The EIA crude oil inventory report showed crude exports surged 46.1% to 4.6 million barrels per day, production remained steady at 12.3 million bpd, and as seasonal maintenance keeps stockpiles rising. 

It looks like oil has been beaten up enough.  It doesn’t seem like recession risks won’t feel real until closer to the summer, so the oil market should be relatively tight until then.  WTI crude has been forming a range between the $73 to $83 region and that should hold up, with the risks being to the upside. 

Gold

Gold is kind of doing its own thing and weakening as more traders capitulate and agree that the Fed will deliver a few more quarter-point rate rises.  Gold is at a 2-month low and it will probably take confirmation that the economy is slowing down faster before prices can muster up a meaningful rally. 

A strong dollar will likely keep gold heavy but we could see some relief if tomorrow’s PCE deflator isn’t as hot as some are fearing.  Gold has massive support around the $1805-1810 region as a plethora of technical indicators indicate oversold conditions.  If gold breaks below the noted region, bearish momentum might not be exhausted until the $1750 area. 

Bitcoin

While Wall Street gyrates over Fed rate hike expectation shifts, Bitcoin wavers around the $24,000 area.  The next several months will be key for finding out the rest of the world embraces cryptos. 

Today, the IMF released a statement on elements of effective policies for crypto assets.  No big surprises came from this 1,131 word paper, but it did outline what they are focusing on; protecting fiat currencies, excessive capital flow volatility, oversight, joint monitoring across regions, and financial stability protections.

The regulatory journey will be a lengthy one, but for now it seems contagion risks from FTX and concerns over Binance are not putting any fresh pressure on cryptos.  Bitcoin appears stuck in a range right now and that might only change if we see risk aversion run wild on Wall Street.