A pre-Christmas rally finally seems to be in progress, as shrinking volumes and an emptying calendar give stocks the space to move higher. Stocks at last make headway “A marginally more festive atmosphere prevails across stock markets this afternoon, with Christmas now very much within sight for most investors. This Santa rally has been long-expected, and eagerly-awaited, but kept being delayed by central banks, inflation data and other road bumps that have prevented any meaningful bounce developing for most of the month so far. Perhaps, with so little on the agenda before Christmas Day, markets finally have scope for a decent rally to round off such a difficult year.” Oil prices push up following inventory data “Oil has had a good day too, with the rebound from oversold levels gaining strength following the drop in inventory data. A year of two halves has seen oil rally and then drop back, and with no sign of any cut in output from OPEC and a recession still likely next year we could well see further drops in price. Consumers will welcome this at least, since it provides a much-needed respite from the surge in fuel prices that dominated the first half of 2022.”

US stocks are rallying after consumer confidence bounces back and on strong earnings by Nike and FedEx. The news was too good today and that has made the many Grinches on Wall Street tentatively throw in the towel. Return of Confidence Today’s consumer confidence reading is a head scratcher for people expecting the economy to quickly fall into a recession.  The Conference Board’s confidence reading surged to 108.3, crushing the consensus estimate of 101.0, and hitting the highest level in 8 months.  Both the present situation and expectations readings improved significantly along with upward revisions to the prior month.  The CB’s Senior Director of Economic Indicators Franco noted, “Inflation expectations retreated in December to their lowest level since September 2021, with recent declines in gas prices a major impetus.”  Consumer spending trends are expected to shift to services as big-ticket items cool further.  The economy is still headed towards a recession, but the consumer continues to show signs of resilience which could delay a significant tumble for equities.  ​ Home Sales The data continues to deteriorate in the housing market.  Existing home sales declined more than expected as surging borrowing costs and weaker consumer hold off home purchases.  Fedex Fedex shares are surging after the delivery giant posted the classic earnings beat and cost reduction announcement.  This quarter was quite the improvement from the prior one that raised concerns of weakening global demand ahead of the holiday season.  The results for both the top and bottom line were lower than a year ago, but an even further acceleration in cost savings is what is helping the share prices.  During the earnings call, FedEx CFO Lenz noted that volume declines should moderate as they move through the rest of the year.  The worst appears to be over FedEx.  Nike Nike crushed this earnings season, inventories are improving, and their outlook going forward was rather upbeat.  The results from China are heading in the right direction as they’ve started to reopen. Wall Street is liking Nike’s top and bottom-line beat, better-than-expected margins, and as inventories declined from last quarter.  North America sales are healthy and Chinese demand should improve going forward.  ​ Oil Crude prices are rallying after stockpiles declined more than expected and as OPEC+ remains committed to keeping supplies tight.  The EIA report showed that crude, gasoline, and distillate demand improved from the prior week.  Gasoline inventories rose but that was somewhat to be expected as peak driving season is well behind us.  Production remained steady while imports tumbled.  As we approach peak holiday season, jet fuel demand has clearly returned, approaching the highest seasonal levels seen since 2017.  The path of least resistance is clearly higher for oil prices and it should continue if China’s reopening doesn’t have major obstacles.  Gold Gold prices are ready to enter holiday mode as the bond market selloff has run out of steam.  Gold got a modest boost after falling inflation bolstered consumer confidence and pushed risky assets higher.  It looks like gold might struggle to get anywhere close to the $1850 level unless we see a fresh major catalyst.  Cryptos Bitcoin wavers as the cryptoverse watches the latest developments with the FTX collapse.  Sam Bankman-Fried has agreed to be extradited to the US and we may soon find out who else in FTX will be investigated and what other companies are impacted. Bitcoin isn't getting much of a boost from the positive risk-on environment that is running through Wall Street.     

A surprise move by the Bank of Japan yesterday triggered a rise in bond yields and strengthened a move lower in the US dollar. US dollar index monthly chart courtesy of StockCharts.com annotations by Mish Yesterday, the Bank of Japan unexpectedly lifted its ceiling on 10-year government bonds from 0.25 percent to 0.50 percent.  Japan 10-year bond yield courtesy of Trading Economics The BOJ lifted the ceiling to stop an unwelcome slide in the yen.  In response, bond yields also jumped in the US. US Treasury Note 10-Year Yield  US 10-year bond yield courtesy of Trading Economics For the first time in a decade, all major central banks are tightening, with Japan still doing the least.  Long term, I doubt this rather pissy move by the Bank of Japan will do much of anything to US treasury yields.  And don't expect the new cap to hold either. Speculators will again force the BOJ's hand. Caps won't work. They are a failed policy.  The same applies to ridiculous Buyers' Cartel Oil Price Caps.  But what about the dollar? US Dollar Support Levels  On the monthly chart, there are strong support levels way below at 90 and 80.  A weekly chart shows additional support zones.  US dollar index weekly chart courtesy of StockCharts.com annotations by Mish The US dollar is right at support. I do not expect much of a bounce here if indeed any. There is minor support at 101 and much stronger support at 95. Given both monthly and weekly support at the 90 level, that is a good spot to bet on reasonable bounce in the dollar. UDN US Dollar Index Bear Fund  US dollar index Bear Fund chart courtesy of StockCharts.com annotations by Mish Dollar Fundamentals Deficit spending in the US is totally out of control. Rising treasury yields will consume increasing amounts of tax revenues The Fed is giving away billions of taxpayer dollars in free money to banks.  US housing market is collapsing  Corporate earnings are falling Consensus earnings are still too high The US stock market is still insanely overvalued, even on a relative basis to the rest of the world The US pace of tightening is slowing while tightening elsewhere rates to catch up a bit. For discussion of free money, please see How Much Free Taxpayer Money is the Fed Giving to Banks? In short, US dollar fundamentals stink.  This may not be the best entry as the dollar is right at support but UDN is worth considering here or on a bounce. Understanding Long Term Moves in Gold, What's Going On? Also consider Understanding Long Term Moves in Gold, What's Going On?

The Bank of Japan made a surprise move on Tuesday morning, extending the permissible yield range of 10-year government bonds. The decision caused the yen to strengthen by more than 3%, and the Nikkei225 index lost as much as 4% before recovering almost half of its initial decline. The central bank of Japan said at the end of its regular meeting that it would switch from a 0.25% yield target to a 0.0-0.50% target range instead. As yields had been held at 0.25% solely due to BoJ purchases, the range extension immediately sent yields to the upper end of the range. This decision meant that the BoJ would print fewer yen to buy government bonds for the FX market, strengthening the currency. Strictly speaking, the Bank of Japan has made monetary policy less accommodating. However, the difference with key rates of other countries remains disastrous, as it is the only one keeping rates negative with an active QE phase. On the other hand, the signal from the softer central bank itself is definite and could be a trial balloon for a fundamental policy reversal. Bank of Japan meetings are no longer boring. We also pay attention to the timing of the changes. The powerful interventions of the Japanese Ministry of Finance in November stopped the USDJPY rising and confirmed the reversal in the pair thanks to a decisive move down on a break-down of the 50-day moving average. Throughout December, we saw a three-week consolidation of the pair just above the 200 SMA. The decisive move down after the extended consolidation has been reinforced by the fact that during the lull in the pair, the stop orders pulled closer to the market and are now triggered in droves. A sharp pullback of the pair under its 200 SMA often signals the reversal of the long-term trend. We had similar signals earlier in the EURUSD and the GBPUSD. In addition, the fall of the USDJPY below 133 was below the 61.8% retracement of the entire momentum of the pair from the beginning of 2021 to the peak in October 2022. Market participants' conviction of a hawkish reversal of Bank of Japan policy could trigger a new round of decline in the pair with a technical target near 127. This is where the 50% level of the mentioned last rally and the support area in May of the year gone by are concentrated.

USD/JPY slumps to over a four-month low in reaction to the BoJ's unexpected hawkish twist. The BoJ shocks markets by adjusting the YCC program and provides a strong lift to the JPY. The Fed's hawkish outlook, rising US bond yields underpins the USD and could lend support. The USD/JPY pair came under heavy selling pressure during the Asian session on Tuesday and dived to over a four-month low after the Bank of Japan (BoJ) announced its policy decision. In an unexpected hawkish twist, the Japanese central bank widened the allowable trading band for the 10-year government bond yield to 50 bps on either side of the 0% target from the 25 bps previous. The move is seen as a step towards the policy normalisation process. The BoJ, however, maintains its guidance to ramp up stimulus as needed and projects that interest rates will move at current or lower levels. Nevertheless, the surprise announcement, along with the prevalent risk-off environment, boosts the Japanese Yen. The market sentiment remains fragile amid worries that a surge in COVID-19 infections in China could delay a broader reopening in the country. To a more significant extent, this overshadows the recent optimism led by the easing of strict lockdown measures in China. Apart from this, the protracted Russia-Ukraine continues to fuel concerns about a deeper global economic downturn and tempers investors' appetite for riskier assets. The anti-risk flow is evident from an extended sell-off in the equity markets, which, in turn, benefits the traditionally safe-haven Japanese Yen. On the other hand, the US Dollar is seeing a mixed performance against its major counterparts and fails to impress bulls or lend any support to the USD/JPY pair. That said, a goodish pickup in the US Treasury bond yields, bolstered by a more hawkish commentary by the Fed last week, might continue to act as a tailwind for the greenback. It is worth recalling that the US central bank indicated that it would continue to raise rates to crush inflation. Furthermore, policymakers projected at least an additional 75 bps increases in borrowing costs by the end of 2023. This is the only factor holding back traders from placing fresh bearish bets around the USD/JPY pair. Market participants now look to the post-meeting press conference, where comments by BoJ Governor Haruhiko Kuroda might influence the JPY. Apart from this, the broader risk sentiment should provide some impetus. Technical Outlook From a technical perspective, a sustained break and acceptance below the important 200-day SMA could be seen as a fresh trigger for bearish traders. Some follow-through selling below the 133.00 mark, coinciding with the 50% Fibonacci retracement level of the strong 2022 rally, will reaffirm the negative bias and pave the way for deeper losses. The USD/JPY pair might accelerate the slide to the 132.15 intermediate support before eventually dropping to the 131.50 region en route to the 131.00 round figure and the 130.40-130.35 zone. On the flip side, attempted recovery moves might now confront immediate resistance near the 134.00 mark ahead of the 134.20-134.25 region. Any further move up is more likely to attract fresh sellers near the 135.00 psychological mark and remain capped near the 135.50-135.60 horizontal zone. The latter coincides with a technically significant 200-day SMA, which should now act as a pivotal point. A sustained strength beyond, though unlikely, might negate the near-term negative outlook and prompt aggressive short-covering around the USD/JPY pair. 

Outlook: This week in the US it’s mostly housing data, consumer confidence and a biggie, personal income and spending on Friday–but Friday is the day before Christmas and almost certainly a short day in Europe and the US. Elsewhere the new include inflation and BoJ meeting in Japan. The IFO and Gfk indices in Germany, and a ton of data from Canada, including CPI and retail sales.   Canada will see a run of important releases headlined by consumer prices on Wednesday, where favorable results are the expectations, preceded by what is expected to be a strong rebound for retail sales on Tuesday and no change for monthly GDP on Friday. Two things count the most: the policy response to the Covid surge in China and US inflation. We have a boatload of opinion pieces on the Chine Covid surge situation. We take the view that China knew it would get a surge of cases and deaths of about a million, as described above, and lifted restrictions anyway. This decision was not to show the protesters what the government was protecting them from, but rather an economic decision. Harsh quarantines and city lockdowns were costing too much economically and lifting unemployment in the critical 17-20 year old demographic. Growth forecasts were down around 3.5%. A good third of the expected deaths are expected in the seriously old population that is not the workforce, anyway. Bottom line: China re-opening means good news for two critical areas–inflation will fall on increased supply and rising commodity prices.    The market is still not buying the Fed’s resolute stance on rates higher for longer. The Fed foresees the Fed funds rate over 5% next year and for most of all of the year. But futures say otherwise–the implied terminal rate for May remains at 4.83%, with almost a half point of rate cuts still priced between then and the end of 2023.   Good news on inflation, maybe–the New York Fed on Friday released its “underlying inflation gauge,” which is NOT core but rather its own alternative to the CPI. For definitions, If you like to get this stuff yourself, you can sign up for the NY Fed’s “email alerts.”    Remember, CPI was 7.1%. The NY Fed underlying inflation ("full data set") gets 4.1%, down 0.2%. The "prices-only" measure is 5.6%, down 0.1%. Here’s a juicy statement: The mean “trend CPI” is within a range of 4.1% to 5.6%, a slightly wider range than October. See the chart.   The thoughtful Authers at Bloomberg writes “A growing majority of observers think inflation is at last at the point where it will come down without too much more help from monetary policy. Evidence that inflation expectations remain fairly well-anchored bolsters this thesis, as does the belief that commodity prices will continue to fall and that supply chain problems are more or less over. With central banks committed to quantitative tightening (selling bonds from their portfolios into the market), as well as keeping rates high, the argument is that inflation will be under 3% by the end of next summer. Such a scenario plainly motivates a majority of the managers controlling large funds at present. A “pain trade” would thus involve rising bond yields and rising risk assets as the economy continued to stay buoyant.”   The mysterious job market in the US is the biggest roadblock to the recession scenario. One pushback to the conventional idea of job growth comes from the Philadelphia Fed’s Early Benchmark Revisions of State Employment Data. The Philly Fed says employment is being seriously overstated by official statistics. In Q2, “In the aggregate, 10,500 net new jobs were added during the period rather than the 1,121,500 jobs estimated by the sum of the states; the U.S. Current Employment Statistics estimated net growth of 1,047,000 jobs for the period.” In other words, employment is overstated by a vast amount–only 10,000 instead of over a million. Authers says “If employment has been overstated this seriously, then the bears may well be right, and further Fed tightening would be very dangerous. Expect this to be a critical issue for the next few months.”   Then there is the conventional wisdom that it takes a super0long time for inflation to be tamed. This is “illustrated in the following chart from History Lessons: How “Transitory” Is Inflation? by Rob Arnott and Omid Shakernia of Research Associates LLC.”   The chart is hard to read. It says, basically, it can take well over a decade to get inflation down from 8% to 3%. Ah, but we say this is based on past inflation periods driven by excessive demand. This time inflation was driven by supply shortages. Can we use that old experience? Still, it’s haunting that “on the basis of post-1970 history, the notion that inflation having topped 8%...