This week promises to be interesting with the release of CPI, PPI, and retail sales data. In addition, there was news about the FDIC taking over SVB Financial Group on Friday.
Although details are limited, having lived through the 2008 financial crisis, I believe federal officials will take appropriate action to prevent systematic threats. Once investors are more comfortable with the details, the market will likely respond positively.
1. Bond Yields
Bond yields may have fallen too much in response to the SVB news on Friday and will begin to rise again once the issue is sorted out. The jobs report on Friday didn’t justify the 50 basis point decline in December Fed Funds Futures alone.30-Day Federal Funds Futures Daily Chart
2. Economic Data
Although the unemployment rate increased slightly, it seems to be due to a surge of new workers entering the labor force. The number of workers not in the labor force can fluctuate from month to month, so it would not be surprising if the number of workers not in the labor force increases in the coming weeks and the unemployment rate falls again back to lower levels.
USEMTOT Index Monthly Chart
Meanwhile, average hourly earnings rose by 0.2%, slightly lower than the estimated 0.3%. However, it was a close call as it concerned rounding. Average hourly earnings increased by 0.0242% in February, from $33.01 to $33.09. If the number had risen to $33.10 per hour, the average hourly earnings would have increased by 0.272%, rounded to 0.3%. It’s unlikely that such a minor rounding error will significantly impact the path of monetary policy in the future.AHE Index Monthly Chart
A flight to safety seemed to be at play, with the market seeking safety first and asking questions later. This is not unusual, and once the situation resolves or is better understood, much of the decline in rates should reverse, with rates moving higher. Whether the Fed continues to raise rates will depend entirely on where things stand two weeks from now. However, I think they will raise rates by at least 25 basis points and signal that more rate hikes are coming. If they were to pause rate hikes unexpectedly, it would send a warning message that they are seeing something of grave concern, causing a significant change in their policy path, and that would not be bullish for stocks.
The CPI report will have the final say on the Fed’s next move.
That said, there was a lot of technical damage done to the two-year Treasury, and at this point, a decline back to 4.5% seems reasonable, with support to hold it there.
US Govt 2-Yr Bonds Daily Chart
3. S&P 500
Likewise, there was a lot of technical damage to the S&P 500, with the index falling below the uptrend that created the lower right portion of the diamond pattern that was pointed out last week. The index also fell below the downtrend line dating back to January 2022 high and the 200-day moving average. Clear support can be seen around 3,750 and 3,800, which could serve as a place for the index to consolidate.
SPX Daily Chart
4. NASDAQ 100
The NASDAQ 100 appears to have formed a broadening wedge pattern, indicating that it may move back down to the lower trend line in the future. The index has also fallen below the 200-day moving average and the support level of 11,900. The next significant level of support for the NASDAQ 100 is around 11,500.
USD Index Daily Chart
The biotech sector has been hit hard lately. First, it was due to rising real yields, and on Friday, it was due to a flight from high-risk asset classes. The XBI has been unable to participate in the rally that started in January and has been consolidating sideways.
The $75.50 level has been a focal point for some time, as it has held every time it was tested and has led to a bounce. Friday was the first time that level was meaningfully broken since last year. However, the ETF closed above $75.50, making it a significant level to watch this week.
XBI Daily Chart
6. DJ Internet Index
The situation with the FDN ETF is not that dissimilar from the XBI. The ETF has seen a necessary support and resistance level of around $135 tested multiple times since last year. On Friday, the ETF also fell below the 200-day moving average and that support level. Regaining that support level is crucial in preventing the ETF from retesting the lows seen in the fall.
FDN Daily Chart
That will be all for this week.