The Weekly Grind: September 25, 2023

Make it 10

That’s 10 straight weeks of gains for the US Dollar Index. In the more than 40 years since the inception of the index, a streak of that length has only happened one other time: 2014. Back then, the Federal Reserve was still more than a year away from raising interest rates off the zero lower bound. This time, they’re nearing the end of one of the fastest tightening cycles in decades. Much like what we saw in 2022, stock prices have reacted poorly to the Dollar’s rally. Last week, the growth-oriented NASDAQ Composite led stocks lower with a 3.6% decline. The Dow Jones Industrial Average was moderately better, falling less than 2%. Meanwhile, 10-year Treasury rates rose to their highest level in more than 15 years.

The Federal Reserve surprised almost no one when they decided to keep their short-term interest rate unchanged at last week’s FOMC meeting. The Committee’s Summary of Economic Projections, though, where members detail their estimates for future economic data and policy actions, showed that officials are reticent to prematurely declare victory. Better-than-expected growth this year has the Fed looking at higher-than-expected rates in 2024 and 2025. In June, the FOMC had projected 100 basis points of rate cuts next year. In the September SEP, they cut that number in half.

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(Premium) FICC in Focus – September

What do we want to own?

That’s the question we ask ourselves every day. Stocks? Bonds? Commodities? Crypto? Cash? The answer doesn’t have to be like flipping a light switch. It’s not like we want to be all in on stocks on Monday, then all in on Treasurys by Tuesday afternoon. Instead, the answer to “What do we want to own?” evolves slowly over time. Our minds gradually change as new evidence comes in, and our decisions follow those slowly-formed opinions.

Stocks have been the place to be since last fall. There’s not much argument about that. In recent weeks, though, the tide seems to have turned in favor of other asset classes. Commodities are leading the way. Check out the ratio of the Invesco DB Commodity Fund (DBC) vs. the S&P 500 below. We’ve broken the downtrend line, momentum just reached overbought territory for the first time all year, and the ratio crossed above the 200-day moving average. It’s a bit early to definitively call this the start of a new uptrend, but at the very least, this year-long downtrend has weakened considerably.

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Mid-Month Macro Update

Slowing Progress on Inflation

Someday, perhaps, we’ll get to stop talking about inflation. As long as prices remain the most important variable in the economic outlook, though, we’ll keep providing updates for our readers.

Last week, we received a fresh batch of inflation data with the August CPI and PPI reports. The Consumer Price Index revealed positive news for economic observers. Core inflation fell for the fifth straight month, and on a 3-month annualized basis, dropped to the lowest level since March 2021.

However, that good news came with a caveat. ‘Core’ measures of inflation strip out the price of food and energy – and energy prices are reaccelerating.

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The Weekly Grind: September 18, 2023

The US Dollar index has risen for 9 weeks in a row. That’s only happened two other times: 2014 and 1997. Crude oil, meanwhile, has risen 10 of the last 12 weeks, and so has the price of 10-Year Treasury futures. Equity indexes were mostly unchanged for the week, and gold and bitcoin both rose modestly.

Nobody said getting inflation under control would be easy. After more than a year of decelerating price increases from last summer’s peak inflation rate, prices are heading the wrong way once again. Last week’s data release showed the Consumer Price Index jumped to 3.7% in August, up from June’s 3% annual rate, and still well above the Federal Reserve’s 2% annual target. A rebound in energy prices (thanks in part to the aforementioned rally in crude oil) is largely to blame for the disappointing inflation report, while the contribution from food and services continues to decline.

At this week’s FOMC meeting, Fed officials will have to contend with the troubling reversal in CPI while balancing the risks to economic growth.

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Top Charts from the Consumer Staples Sector

The Consumer Staples sector has hovered near the flat line all year, despite a big gain for the benchmark S&P 500 index. Only the Utilities have turned in a worse performance so far in 2023.

Perhaps the final quarter of the year will be a different story? October, November, and December have historically been the best months of the year to own the Staples, so they’re worth watching closely for any signs of a bounce.

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(Premium) Utilities Sector Deep Dive – September

It’s tough to outperform at all when you’re mired in a protracted downtrend. The Utes are stuck on the left side of the weekly Relative Rotation Graph, alternating between the ‘Lagging’ and ‘Improving’ quadrants, but never reaching the ‘Leading’ one.

It’s a trend that’s been in place for the last 15 years.

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(Premium) Health Care Sector Deep Dive – September

The Health Care Sector is near the bottom of the year-to-date sector derby. The benchmark S&P 500 index has risen 16.8% before dividends, but that gain hasn’t been broadly distributed. Health Care stocks are down 2%.

The problem isn’t really that Health Care is in a downtrend. The problem is there’s no trend at all.

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(Premium) Consumer Staples Sector Deep Dive – September

If we’re going to see the Consumer Staples bounce, it’ll need to start with an improvement in breadth.

Today, nearly three-quarters of the sector’s constituents are in long-term technical downtrends, while the other quarter remain in technical uptrends. But things are deteriorating on a short-term basis, where just 1 in 10 are in short-term technical uptrends.

The sector will need to turn things around in short order if it’s to have any hope of riding a fourth quarter rally.

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