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Fed 50, BOE 25, and the BOJ to Stand Pat: Week Ahead

Three G7 central banks meet in the coming days, and they dominate the macro stage. The Federal Reserve’s meeting concludes on Wednesday, the Bank of England…



Three G7 central banks meet in the coming days, and they dominate the macro stage. The Federal Reserve's meeting concludes on Wednesday, the Bank of England on Thursday, and the Bank of Japan on Friday.

The market recognizes a strong consensus has emerged at the FOMC for 50 bp hikes in June, but the unexpectedly strong CPI report before the weekend saw the market price in about a 50% chance of a 75 bp hike in July. Some Fed officials have been understandably reluctant to venture much of an opinion about the September meeting. After the CPI print, the market expects 50 bp move in September and November.

The Fed governor and regional president that are seen as the most hawkish are Governor Waller and St. Louis Fed President Bullard. Their hawkishness needs to be understood within the context of the market. Their "beef", as it were, is not with the market, who they say their views are aligned with, but with their colleagues. In March, the median dot was for the Fed funds range to be 1.75%-2.0% at the end of the year.  The Fed funds futures market is closer to 3.15%. In March, there was only one forecast around the current market expectation. The median dot for the end of 2023 was 2.75%. The market is now at 3.50%.

We suspect the two new governors' dots will be consistent with the Fed's leadership. The median forecast for this year's GDP may be reduced from 2.8% to closer to 2.5%. If the median forecast for the PCE deflator (4.3% 2022 and 2.7% 2023) is raised, it would add to a hawkish message. The median forecast was for the unemployment rate to remain at 3.5%, in the face of the tightening and be at 3.6% at the end of 2024. Some of the Fed's critics poked at this and it will be interesting to see if it changes. The University of Michigan's consumer has tanked to levels not seen during past recessions, the tech bubble, the Great Financial Crisis, or the start of the pandemic. Some economists are claiming that the US is already in a recession. The Fed cannot be happy with the new increase in consumer inflation expectations the survey picked up.

In May, the FOMC statement acknowledged the contraction in Q1 GDP but noted that household spending and business investment (final sales to domestic purchasers) remained strong. This still seems to be a fair characterization of the economy. It said jobs gains were robust. Nonfarm payrolls rose by an average of 539k in Q1 22 and have averaged 413k in the first two months of Q2. Will the Fed recognize the moderation, or is it too early considering that in April and May 2021, the job growth averaged 355k a month?  Besides technical adjustments, most of the rest of the statement is likely to be little changed.  This includes the likelihood that despite variance of views, there is an agreement about the 50 bp rate hike and no dissents are likely.

When the Fed's rhetoric began changing last September, the December 22 Fed funds futures were implying a 0.35% 2022 year-end rate. It finished last year slightly above 0.80%. On the eve of the Fed's hike on March 16, the Dec contract implied about a 1.95% year-end rate. By the eve of the May 4 hike, the implied yield was closer to 2.75%. It finished last week a little above 3%. The swaps market has a terminal rate of about 3.75%.

The Bank of England is expected to hike its base rate by 25 bp on June 16 to 1.25%. It would be the fifth hike in the cycle that began last December with a 15 bp move. The swaps market is pricing in about a one in three chance of a 50 bp increase. There are five meetings left this year and the market has 180 bp of tightening discounted. This seems particularly aggressive given that it is consistent with two 50 bp hikes and three quarter-point moves.

The tightening of US monetary policy beginning in the late 1970s when Paul Volcker become the Federal Reserve Chair is the stuff legends are made off. Using the cover of money supply growth, Volcker led the Fed into hiking rates even as unemployment was climbing. Volcker, appointed by Carter, a Democrat, helped facilitate the Reagan-era capital offensive that liberated capital mobility, spurred financial innovation, but also generated a dramatic divergence of wealth and income that some argue is a bigger threat to the US economy (and political life) than inflation. Although, there was a hope in some quarters that Powell would take up the mantle, it seems BOE governor is channeling Volcker.

The Fed has begun an aggressive tightening course, but it sees the economy as strong and plays down recession worries. US unemployment is around half the pace it was when the Fed under Volcker began hiking. As we noted, it claims that it can raise interest rates sharply and shrink the balance sheet twice as fast as it did previously with no meaningful deterioration of the labor market. The Bank of England is a different kettle of fish. In May it warned that the economy is likely to contract next year and expand by a miniscule 0.3% in 2024. It envisions unemployment rising from 3.5% this year to 4.3% next and 5.0% in 2024. The three-month year-over-year rate calculated by the ILO stood at 3.7% in March. The April estimate is due June 14.

UK CPI was 9% above year ago levels in April. Last month, the BOE estimated that 80% of the overshoot in inflation is a function of the surge in energy prices and tradeable goods. Gas and electricity regulated prices jumped by nearly 55% in April and are expected to rise a little more than 40% in October. Consider that gasoline costs about GBP2 per liter, which converts to more than $11 a gallon. Between higher energy and food prices, and tax increases, the UK is experiencing a once-in-a-generation cost-of-living squeeze.

Just like Volcker-led hikes helped shape the American political discourse, BOE Governor Bailey's hikes could also impact the UK's politics. Prime Minister Johnson survived a vote of confidence over the objection of 41% of the Tory members of Parliament. Ultimately, Johnson's value to the party is that he led them into victory and regained the Conservative majority. However, this claim to fame has weakened. The Tories look set to lose two special elections on June 23 that were forced as the Tory MPs were forced to resign in separate sex scandals. Although, they do not reflect on Johnson, his government has been lambasted for the "sleaze factor."  

The latest YouGov poll gives Labour an eight-percentage point advantage (39%-31%). A full third of those survey said that Labour leader Starmer, who also, incidentally, faces his own possible "partygate" would be a better prime minister than Johnson. A quarter favored Johnson. After the special elections, the next big hurdle for Johnson will be the Conservative Party Conference in October.

The Federal Reserve has all but committed to a 50 bp rate hike next week. The Bank of England will likely move by 25 bp. The Bank of Japan, the third G5 central bank that meets in the week ahead, will stand pat. BOJ Governor Kuroda has been explicit. The rise in the CPI, with the core (excluding fresh food) poking above the 2% target, is being driven by factors that are not sustainable, like the base effect from last year's cut in the cell phone charges, and higher energy prices. Excluding fresh food and energy, prices rose 0.8% from a year ago in April. It has not been above 1% for six years. The market appears to agree with Kuroda as the 10-year breakeven (the difference between the conventional 10-year yield and the inflation-linked security) is below 90 bp.

Kuroda, whose term expires in April 2023, has renewed the BOJ's commitment to the capping the 10-year yield at 0.25%. This comes, of course, not just in the face of the rising inflation, but also while major bond yields in the US and Europe have risen sharply. As a result of the divergence of monetary policy the yen has weakened sharply.

The correlation of the change in dollar-yen exchange rate and the US 10-year yield is a little above 0.5 over the last 60 sessions and a little below in the past 30. The euro is trading at eight-year highs against the Japanese yen. The change in the cross rate and the 10-year German Bund yield is stable around 0.60 for the past 30 and 60 days.

Even if the divergence of interest rates is the key driver pushing the yen lower, there are also other considerations. For example, Japan is also experiencing a negative terms of trade shock. Consider that Japan had a current account surplus of JPY3.5 trillion in the first four months of this year, slightly more than half the surplus in the same period last year. Lenin once quipped that in battle, feel mush push; feel steel retreat, which also seems to apply to foreign exchange. That the yen's decline in being driven by economic fundamentals, and that Kuroda has no intention to alter the monetary course, and, if anything, still sees net advantages of a weak currency, the risk of intervention (steel) is low.

Although some observers have talked about the risk of intervention, it mostly seen at higher dollar levels. Some reports cite interest one-year JPY150 calls. Japanese officials' verbal intervention stepped up at the end of last week, but the concern is still over the pace of the move and not levels. Moreover, the impact of the verbal intervention was quickly blunted by the stronger than expected rise in the US CPI.

It seems that trades fall into three categories. The first is momentum or trend following. The second is mean reversion or going against the trend. The third is carry trade, which is a version of interest rate arbitrage. Sell a low yielding currency and buy a higher yielding currency. The profit or loss is derived from the different yields rather than spot movement. The short yen position now is a momentum or trend following trade and it can also be part of a carry trade.

The challenge with carry trades is that a volatility of the currencies can overwhelm the interest rate differential. For example, imagine you can borrow yen for around six basis points annualized convert into dollars for a three-month time deposit and earn around 170 bp (annualized). With the three-month volatility of the dollar-yen exchange rate implied in the options market of over 11%, one can appreciate how movement in the spot market easily negate the yield pick-up. It is why some have characterized the carry trading in the foreign exchange market as picking up pennies in front of steam roller.

If the rise in US 10-year yields is the key to understanding the depreciation of the yen against the dollar, to ask when the greenback peaks is to ask when US rates peak. That in turn depends to a great extent on the terminal rate for Fed funds. If the target rate peaks at 3.50%-3.75% as many think now and is priced into the swaps market, then arguably the 10-year yield has "value" as it approaches 3.20%. 

The momentum indicators for dollar-yen corrected lower last month but have risen sharply over the past couple of weeks. The MACD is still accelerating higher but the Slow Stochastic is over-extended and can turn lower with a setback in spot. The dollar closed above its upper Bollinger Band (two standard deviations above the 20-day moving average) every session last week. Speculators in the futures market already have a substantial short yen position (short about 94.5k contracts, JPY12.5 mln per contract, or roughly $93k per contract, or about $8.8 bln overall). They have not been net long since March 2021. Market sentiment, with the talk of JPY150 calls, seems extreme.

The surge in US and German rates warns that the BOJ efforts to cap the 10-year bond yield at 0.25% will be challenged again in the coming days. It has been successful so far and it has not cost it much money. Defending the cap is has been negative for the yen as it drives home the point that monetary policy has not changed and is the heart of divergence that is driving the exchange rate. 


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‘The Official Truth’: The End Of Free Speech That Will End America

‘The Official Truth’: The End Of Free Speech That Will End America

Authored by J.B.Shurk via The Gatestone Institute,

If legacy news corporations…



'The Official Truth': The End Of Free Speech That Will End America

Authored by J.B.Shurk via The Gatestone Institute,

If legacy news corporations fail to report that large majorities of the American public now view their journalistic product as straight-up propaganda, does that make it any less true?

According to a survey by Rasmussen Reports, 59% of likely voters in the United States view the corporate news media as "truly the enemy of the people." This is a majority view, held regardless of race: "58% of whites, 51% of black voters, and 68% of other minorities" — all agree that the mainstream media has become their "enemy."

This scorching indictment of the Fourth Estate piggybacks similar polling from Harvard-Harris showing that Americans hold almost diametrically opposing viewpoints from those that news corporations predominantly broadcast as the official "truth."

Drawing attention to the divergence between the public's perceived reality and the news media's prevailing "narratives," independent journalist Glenn Greenwald dissected the Harvard-Harris poll to highlight just how differently some of the most important issues of the last few years have been understood. While corporate news fixated on purported Trump-Russia collusion since 2016, majorities of Americans now see this story "as a hoax and a fraud."

While the news media hid behind the Intelligence Community's claims that Hunter Biden's potentially incriminating laptop (allegedly containing evidence of his family's influence-peddling) was a product of "Russian disinformation" and consequently enforced an information blackout on the explosive story during the final weeks of the 2020 presidential election, strong majorities of Americans currently believe the laptop's contents are "real." In other words, Americans have correctly concluded that journalists and spies advanced a "fraud" on voters as part of an effort to censor a damaging story and "help Biden win." Nevertheless, The New York Times and The Washington Post have yet to return the Pulitzer Prizes they received for reporting totally discredited "fake news."

Similarly, majorities of Americans suspect that President Joe Biden has used the powers of his various offices to profit from influence-peddling schemes and that the FBI has intentionally refrained from investigating any possible Biden crimes. Huge majorities of Americans, in fact, seem not at all surprised to learn that the FBI has been caught abusing its own powers to influence elections, and are strongly convinced that "sweeping reform" is needed. Likewise, large majorities of Americans have "serious doubts about Biden's mental fitness to be president" and suspect that others behind the scenes are "puppeteers" running the nation.

Few, if any, of these poll results have been widely reported. In a seemingly-authoritarian disconnect with the American people, corporate news media continue to ignore the public's majority opinion and instead "relentlessly advocate" those viewpoints that Americans "reject." When journalists fail to investigate facts and deliberately distort stories so that they fit snugly within preconceived worldviews, reporters act as propagandists.

Constitutional law scholar Jonathan Turley recently asked, "Do we have a de facto state media?" In answering his own question, he notes that the news blackout surrounding congressional investigations into Biden family members who have allegedly received more than ten million dollars in suspicious payments from foreign entities "fits the past standards used to denounce Russian propaganda patterns and practices." After Republican members of Congress traced funds to nine Biden family members "from corrupt figures in Romania, China, and other countries," Turley writes, "The New Republic quickly ran a story headlined 'Republicans Finally Admit They Have No Incriminating Evidence on Joe Biden.'"

Excoriating the news media's penchant for mindlessly embracing stories that hurt former President Donald Trump while simultaneously ignoring stories that might damage President Biden, Turley concludes:

"Under the current approach to journalism, it is the New York Times that receives a Pulitzer for a now debunked Russian collusion story rather than the New York Post for a now proven Hunter Biden laptop story."

Americans now evidently view the major sources for their news and information as part of a larger political machine pushing particular points of view, unconstrained by any ethical obligation to report facts objectively or dispassionately seek truth. That Americans now see the news media in their country as serving a similar role as Pravda did for the Soviet Union's Communist Party is a significant departure from the country's historic embrace of free speech and traditional fondness for a skeptical, adversarial press.

Rather than taking a step back to consider the implications such a shift in public perception will have for America's future stability, some officials appear even more committed to expanding government control over what can be said and debated online. After the Department of Homeland Security (DHS), in the wake of public backlash over First Amendment concerns, halted its efforts to construct an official "disinformation governance board" last year, the question remained whether other government attempts to silence or shape online information would rear their head. The wait for that answer did not take long.

The government apparently took the public's censorship concerns so seriously that it quietly moved on from the collapse of its plans for a "disinformation governance board" within the DHS and proceeded within the space of a month to create a new "disinformation" office known as the Foreign Malign Influence Center, which now operates from within the Office of the Director of National Intelligence. Although ostensibly geared toward countering information warfare arising from "foreign" threats, one of its principal objectives is to monitor and control "public opinion and behaviors."

As independent journalist Matt Taibbi concludes of the government's resurrected Ministry of Truth:

"It's the basic rhetorical trick of the censorship age: raise a fuss about a foreign threat, using it as a battering ram to get everyone from Congress to the tech companies to submit to increased regulation and surveillance. Then, slowly, adjust your aim to domestic targets."

If it were not jarring enough to learn that the Office of the Director of National Intelligence has picked up the government's speech police baton right where the DHS set it down, there is ample evidence to suggest that officials are eager to go much further in the near future. Democrat Senator Michael Bennet has already proposed a bill that would create a Federal Digital Platform Commission with "the authority to promulgate rules, impose civil penalties, hold hearings, conduct investigations, and support research."

Filled with "disinformation" specialists empowered to create "enforceable behavioral codes" for online communication — and generously paid for by the Biden Administration with taxpayers' money — the special commission would also "designate 'systemically important digital platforms' subject to extra oversight, reporting, and regulation" requirements. Effectively, a small number of unelected commissioners would have de facto power to monitor and police online communication.

Should any particular website or platform run afoul of the government's First Amendment Star Chamber, it would immediately place itself within the commission's crosshairs for greater oversight, regulation, and punishment.

Will this new creation become an American KGB, Stasi or CCP — empowered to target half the population for disagreeing with current government policies, promoting "wrongthink," or merely going to church? Will a small secretive body decide which Americans are actually "domestic terrorists" in the making? US Attorney General Merrick Garland has gone after traditional Catholics who attend Latin mass, but why would government suspicions end with the Latin language? When small commissions exist to decide which Americans are the "enemy," there is no telling who will be designated as a "threat" and punished next.

It is not difficult to see the dangers that lie ahead. Now that the government has fully inserted itself into the news and information industry, the criminalization of free speech is a very real threat. This has always been a chief complaint against international institutions such as the World Economic Forum that spend a great deal of time, power, and money promoting the thoughts and opinions of an insular cabal of global leaders, while showing negligible respect for the personal rights and liberties of the billions of ordinary citizens they claim to represent.

WEF Chairman Klaus Schwab has gone so far as to hire hundreds of thousands of "information warriors" whose mission is to "control the Internet" by "policing social media," eliminating dissent, disrupting the public square, and "covertly seed[ing] support" for the WEF's "Great Reset." If Schwab's online army were not execrable enough, advocates for free speech must also gird themselves for the repercussions of Elon Musk's appointment of Linda Yaccarino, reportedly a "neo-liberal wokeist" with strong WEF affiliations, as the new CEO of Twitter.

Throughout much of the West, unfortunately, free speech has been only weakly protected when those with power find its defense inconvenient or messages a nuisance. It is therefore of little surprise to learn that French authorities are now prosecuting government protesters for "flipping-off" President Emmanuel Macron. It does not seem particularly astonishing that a German man has been sentenced to three years in prison for engaging in "pro-Russian" political speech regarding the war in Ukraine. It also no longer appears shocking to read that UK Technology and Science Secretary Michelle Donelan reportedly seeks to imprison social media executives who fail to censor online speech that the government might subjectively adjudge "harmful." Sadly, as Ireland continues to find new ways to punish citizens for expressing certain points of view, its movement toward criminalizing not just speech but also "hateful" thoughts should have been predictable.

From an American's perspective, these overseas encroachments against free speech — especially within the borders of closely-allied lands — have seemed sinister yet entirely foreign. Now, however, what was once observed from some distance has made its way home; it feels as if a faraway communist enemy has finally stormed America's beaches and come ashore in force.

Not a day seems to go by without some new battlefront opening up in the war on free speech and free thought. The Richard Stengel of the Council on Foreign Relations has been increasingly vocal about the importance of journalists and think tanks to act as "primary provocateurs" and "propagandists" who "have to" manipulate the American population and shape the public's perception of world events. Senator Rand Paul has alleged that the DHS uses at least 12 separate programs to "track what Americans say online," as well as to engage in social media censorship.

As part of its efforts to silence dissenting arguments, the Biden administration is pursuing a policy that would make it unlawful to use data and datasets that reflect accurate information yet lead to "discriminatory outcomes" for "protected classes." In other words, if the data is perceived to be "racist," it must be expunged. At the same time, the Department of Justice has indicted four radical black leftists for having somehow "weaponized" their free speech rights in support of Russian "disinformation." So, objective datasets can be deemed "discriminatory" against minorities, while actual discrimination against minorities' free speech is excused when that speech contradicts official government policy.

Meanwhile, the DHS has been exposed for paying tens of millions of dollars to third-party "anti-terrorism" programs that have not so coincidentally equated Christians, Republicans, and philosophical conservatives to Germany's Nazi Party. Similarly, California Governor Gavin Newsom has set up a Soviet-style "snitch line" that encourages neighbors to report on each other's public or private displays of "hate."

Finally, ABC News proudly admits that it has censored parts of Robert F. Kennedy Jr.'s interviews because some of his answers include "false claims about the COVID-19 vaccines." Essentially, the corporate news media have deemed Kennedy's viewpoints unworthy of being transmitted and heard, even though the 2024 presidential candidate is running a strong second behind Joe Biden in the Democrat primary, with around 20% support from the electorate.

Taken all together, it is clear that not only has the war on free speech come to America, but also that it is clobbering Americans in a relentless campaign of "shock and awe." And why not? In a litigation battle presently being waged over the federal government's extensive censorship programs, the Biden administration has defended its inherent authority to control Americans' thoughts as an instrumental component of "government infrastructure." What Americans think and believe is openly referred to as part of the nation's "cognitive infrastructure" — as if the Matrix movies were simply reflecting real life.

Today, America's mainstream news corporations are already viewed as processing plants that manufacture political propaganda. That is an unbelievably searing indictment of a once-vibrant free press in the United States. It is also, unfortunately, only the first heavy shoe to drop in the war against free speech. Many Chinese-Americans who survived the Cultural Revolution look around the country today and see similarities everywhere. During that totalitarian "reign of terror," everything a person did was monitored, including what was said while asleep.

In an America now plagued with the stench of official "snitch lines," censorship of certain presidential candidates, widespread online surveillance, a resurrected "disinformation governance board," and increasingly frequent criminal prosecutions targeting Americans who exercise their free speech, the question is not whether what we inaudibly think or say in our sleep will someday be used against us, but rather how soon that day will come unless we stop it. After all, with smartphones, smart TVs, "smart" appliances, video-recording doorbells, and the rise of artificial intelligence, somebody, somewhere is always listening.

Tyler Durden Sun, 05/28/2023 - 23:00

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Never Short a Dull Market; AI is Sexy, But Everyone Hates Oil

There’s an old adage of Wall Street, which says: "never short a dull market." And while AI is getting all the press these days, the oil market is about…



There's an old adage of Wall Street, which says: "never short a dull market." And while AI is getting all the press these days, the oil market is about as dull as it gets. This, of course, brings the energy sector to the top of my contrarian alert list.

This is not to say that I'm buying oil-related assets with both hands. It just means that, at this point, it makes more sense to look at energy as a value asset, as it is oversold and ripe for a move up whenever the right set of variables required to deliver such a move line up just right.

In the current world, the variables could line up just right as early as today.

There are No Oil Bulls Left

Nobody loves oil.

The level of bearishness expressed by futures traders is at least equal to where it was during the pandemic, and after the Silicon Valley Bank (SIVB) collapse. The International Energy Agency (IEA), forecasts that, of the expected $2.8 trillion in energy investments for 2023, roughly $1.7 trillion will be allocated to low carbon energy sources, including nuclear, solar, and other potential sources. Only $1.1 trillion will be invested in fossil fuels.

And according to the Financial Times, auctioneers in Texas are trying to unload two brand new fracking rigs, which together cost $70 million, for a starting combined bid of just below $17 million.

Supply is the Primary Influence on Oil Prices

Meanwhile, oil companies are quietly merging with competitors, and exploration outside the United States is continuing aggressively, with new discoveries being frequently announced. 

Simultaneously, the U.S. active rig count is slowly falling, led by natural gas. The price of gasoline is steadily rising, as the market begins to price in future supply reductions. Just in my neck of the woods, regular unleaded is up some $0.32 in the last week alone.

That doesn't sound like an industry that's planning on fading away. It sounds like an industry that's hunkering down and waiting for better times and preparing to squeeze supply in order to boost prices.

Charting the Oil Sector

The price chart for West Texas Intermediate Crude, the U.S. benchmark (WTIC), shows the depressed price picture which has led investors to walk away. And, until proven otherwise, there are plenty of sellers at the $75-$80 price area, where a sizeable Volume by Price bar highlights the point of resistance.

At first glance, there little difference in the general price behavior for Brent Crude, the European benchmark. (BRENT) where there is a resistance band defined by VBP bars between $80 and $90. A closer look reveals an uptick in Accumulation Distribution (ADI) and the semblance of some nibbling in On Balance Volume (OBV). It's subtle, but it's there.

The oil stocks are far from a bull trend. The Energy Select Sector SPDR ETF (XLE) is trading below its 200-day moving average, facing resistance put from $78 to $90 (VBP bars).

So why bother? Simply stated, OPEC has an upcoming meeting on June 3-4. The cartel is not happy about the prices and the way things are evolving. The Saudi oil minister recently warned bearish speculators to "watch out." And my gut is doing flips when I think about oil, as I see gasoline prices creep up when I drive to work.

But mostly, it's because there are no oil bulls left. This is what we saw in the technology sector a few months ago before its current rally. In early 2023, the tech sector was pronounced dead. The stories were all about the technology sector shuddering as the economy slowed. How about this one, from March 2023, which breathlessly announced a 5.2% decrease in semiconductor sales on a month to month basis and an 18.5% year to year drop?

Yet, as validated by the recent AI-fueled rally, the bad news first marked a bottom, while preceding a significant move up in tech shares.

Never short a dull market.

I've recently recommended several energy sector picks. You can have a look at them with a free trial to my service. In addition, I've posted a Special Report on the oil market which you can gain access to here.

Bond and Mortgage Roller Coaster Reverses Course

Expect negative news about the effect of rising mortgage rates on the homebuilder industry. That's because, as the chart below illustrates, there is a tight and very close correlation between rising bond yields, mortgage rates, and the homebuilder stocks (SPHB).

Moreover, the rise above 3.75% on the U.S. Ten Year Note yield (TNX) has triggered headlines about mortgage rates climbing above 7%. What the news isn't reporting is that, once bond yields roll over, which they are likely to do at some point in the future when the economy shows more signs of slowing and the Fed finally admits that they must pause, is that mortgage rates will drop and demand for new homes will once again pick up. Thus, we will see the homebuilders pick up where they left off.

As things stood last week, SPHB seems to have made a short term bottom.

For now, expect a continuation of the backing and filling in the homebuilder stocks. But, if I'm right and bond yields reverse course, the homebuilders are likely to rally again.

For an in-depth comprehensive outlook on the homebuilder sector click here.

NYAD Holds Above 200-Day Moving Average. SPX Joins NDX in Breaking Out. Liquidity is Shrinking.

The New York Stock Exchange Advance Decline line (NYAD) tested its 200-day moving average on an intra-week basis but did not break below the key technical level. On the other hand, NYAD remained below its 50-day moving average, which is still an intermediate-term negative.

Moreover, with the major indexes (see below) breaking out to new highs, we remain in a technical divergence as the market's breadth is lagging the action in the indexes. This is of some concern, given the fade in the market's liquidity, as I point out below.

The Nasdaq 100 Index (NDX) extended its recent breakout, closing the week well above 14,200. The current move is unsustainable, so some sort of pullback and consolidation are likely over the next few days to weeks. Both ADI and OBV remain encouraging.

What's more bullish is that the S&P 500 (SPX) finally broke out above the 4100–4200 trading range on 5/24/23. On Balance Volume (OBV) is perking up while the Accumulation Distribution (ADI) indicator is very encouraging.

We may be seeing a shift from a short-covering rally to a fear-of-missing-out buyer's rally.

VIX Holds Steady

The CBOE Volatility Index (VIX) remained below 20, as it has since March 2023. This remains a positive for the markets, as it shows short sellers are staying away at the moment.

When the VIX rises, stocks tend to fall, as rising put volume is a sign that market makers are selling stock index futures to hedge their put sales to the public. A fall in VIX is bullish, as it means less put option buying, and it eventually leads to call buying, which causes market makers to hedge by buying stock index futures. This raises the odds of higher stock prices.

Liquidity is Getting Squeezed

The market's liquidity is now in a downtrend. The Eurodollar Index (XED) is now below 94.5, and looks weak. A move above 95 will be a bullish development. Usually, a stable or rising XED is very bullish for stocks.

To get the latest up-to-date information on options trading, check out Options Trading for Dummies, now in its 4th Edition—Get Your Copy Now! Now also available in Audible audiobook format!

#1 New Release on Options Trading!

Good news! I've made my NYAD-Complexity - Chaos chart (featured on my YD5 videos) and a few other favorites public. You can find them here.

Joe Duarte

In The Money Options

Joe Duarte is a former money manager, an active trader, and a widely recognized independent stock market analyst since 1987. He is author of eight investment books, including the best-selling Trading Options for Dummies, rated a TOP Options Book for 2018 by and now in its third edition, plus The Everything Investing in Your 20s and 30s Book and six other trading books.

The Everything Investing in Your 20s and 30s Book is available at Amazon and Barnes and Noble. It has also been recommended as a Washington Post Color of Money Book of the Month.

To receive Joe's exclusive stock, option and ETF recommendations, in your mailbox every week visit

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Costco Tells Americans the Truth About Inflation and Price Increases

The warehouse club has seen some troubling trends but it’s also trumpeting something positive that most retailers wouldn’t share.



Costco has been a refuge for customers during both the pandemic and during the period when supply chain and inflation issues have driven prices higher. In the worst days of the covid pandemic, the membership-based warehouse club not only had the key household items people needed, it also kept selling them at fair prices.

With inflation -- no matter what the reason for it -- Costco  (COST) - Get Free Report worked aggressively to keep prices down. During that period (and really always) CFO Richard Galanti talked about how his company leaned on vendors to provide better prices while sometimes also eating some of the increase rather than passing it onto customers.

DON'T MISS: Why You May Not Want to Fly Southwest Airlines

That wasn't an altruistic move. Costco plays the long game, and it focuses on doing whatever is needed to keep its members happy in order to keep them renewing their memberships.

It's a model that has worked spectacularly well, according to Galanti.

"In terms of renewal rates, at third quarter end, our US and Canada renewal rate was 92.6%, and our worldwide rate came in at 90.5%. These figures are the same all-time high renewal rates that were achieved in the second quarter, just 12 weeks ago here," he said during the company's third-quarter earnings call.

Galanti, however, did report some news that suggests that significant problems remain in the economy.

Costco has done an incredibly good job at holding onto members.

Image source: Xinhua/Ting Shen via Getty Images

Costco Does See Some Economic Weakness

When people worry about the economy, they sometimes trade down when it comes to retailers. Walmart executives (WMT) - Get Free Report, for example, have talked about seeing more customers that earn six figures shopping in their stores.

Costco has always had a diverse customer base, but one weakness in its business may be a warning sign for its rivals like Target (TGT) - Get Free Report, Best Buy (BBY) - Get Free Report, and Amazon (AMZN) - Get Free Report. Galanti broke down some of the numbers during the call.

"Traffic or shopping frequency remains pretty good, increasing 4.8% worldwide and 3.5% in the U.S. during the quarter," he shared.

People shopped more, but they were also spending less, according to the CFO.

"Our average daily transaction or ticket was down 4.2% worldwide and down 3.5% in the U.S., impacted, in large part, from weakness in bigger-ticket nonfood discretionary items," he shared.

Now, not buying a new TV, jewelry, or other big-ticket items could just be a sign that consumers are being cautious. But, if they're not buying those items at Costco (generally the lowest-cost option) that does not bode well for other retailers.

Galanti laid out the numbers as well as how they broke down between digital and warehouse.

"You saw in the release that e-commerce was a minus 10% sales decline on a comp basis," he said. "As I discussed on our second quarter call and in our monthly sales recordings, in Q3, big-ticket discretionary departments, notably majors, home furnishings, small electrics, jewelry, and hardware, were down about 20% in e-com and made up 55% of e-com sales. These same departments were down about 17% in warehouse, but they only make up 8% in warehouse sales."

Costco's CFO Also Had Good News For Shoppers

Galanti has been very open about sharing information about the prices Costco has seen from vendors. He has shared in the past, for example, that the chain does not pass on gas price increases as fast as they happen nor does it lower prices as quick as they sometimes fall.

In the most recent call, he shared some very good news on inflation (that also puts pressure on Target, Walmart, and Amazon to lower prices).

"A few comments on inflation. Inflation continues to abate somewhat. If you go back a year ago to the fourth quarter of '22 last summer, we had estimated that year-over-year inflation at the time was up 8%. And by Q1 and Q2, it was down to 6% and 7% and then 5% and 6%," he shared. "In this quarter, we're estimating the year-over-year inflation in the 3% to 4% range."

The CFO also explained that he sees prices dropping on some very key consumer staples.

"We continue to see improvements in many items, notably food items like nuts, eggs and meat, as well as items that include, as part of their components, commodities like steel and resins on the nonfood side," he added.


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