Stock bulls continue to struggle as Wall Street starts to dial back Federal Reserve rate cut expectations and the US federal government inches closer to a partial shutdown.

The latest blow to the bulls hopes for sharply lower interest rates came yesterday from Retail Sales, which blew past economist expectations to climb +0.6% in December, double November's pace.

This adds to other recent data indicating a US economy that, if anything, is showing signs of increasing strength that could fan worries at the Fed about a return of inflation.

Many bulls continue to pencil the first rate-cut as soon as the March 19-20 policy meeting even though Wall Street this week has been lowering expectations for how much the Fed might cut rates this year.

According to the CME FedWatch Tool, traders have dropped the odds of a 25-basis point cut in March to just under 54% versus nearly 65% a week ago. Traders have also trimmed their outlook for how deep Fed cuts will be in 2024. Most now expect the Fed's benchmark rate will be 125 to 150 basis points lower by the end of the year, versus 150 to 175 lower just last week. That still would amount to five or six 25-basis point trims.

For reference, there are 7 Fed policy meetings between March and December 2024. The latest projections by Fed officials see the benchmark rate being lowered by a more modest 75 basis points in 2024.

Many bears point out that the degree of cuts that bulls are penciling are verging on the sort of dramatic moves the Fed typically only makes when the economy is in trouble. In other words, stock bulls are anticipating "recession-style" Fed policy without an actual economic downturn.

Today, investors will be digesting the Philadelphia Fed Manufacturing Index and Housing Starts & Permits.

On the earnings front, Taiwan Semiconductor today will be the first major tech company deliver Q4 results. While the company's market cap is far below big tech behemoths like Apple or NVIDIA, demand for its chips is still a good indicator of demand across the wider tech industry. Meaning Taiwan Semiconductor's results could influence investor sentiment toward some of the biggest companies in the world, most of which will report earnings next week.

Unfortunately, any renewed optimism at this point in the week could be quashed by Congress and the threat of a partial government shutdown. If lawmakers fail to pass a spending bill by the end of the day on Friday, the Agriculture, Energy-Water, Military Construction-VA, and Transportation-HUD Departments will shut down on Saturday, January 20.

The remaining departments and agencies funded through the annual appropriations process will shut down on February 2 if lawmakers are still at a logjam. 

US Producing Record Amounts of Oil, but Exports Might Take a Hit  - U.S. oil production has “nearly tripled in the last 15 years, fueled by advances in drilling and fracking technology and investments in the early 2010s due to sustained higher oil prices and favorable government policies. U.S. crude-oil production stood at 13.2 million barrels per day as of the week ended Jan. 5, after reaching a record at 13.3 million bpd for the weeks ended Dec. 15 and Dec. 22, according to data from the Energy Information Administration. Imre Kugler, director of upstream research at S&P Global Commodity Insights, said that in roughly the last year and a half, the U.S. has had a +10% increase in the rate of penetration — the amount of feet drilled per day. That means a rig today drills +10% more than it did just 2 years ago, he said. That’s where a lot of “efficiency gains” have been made. Baker Hughes reported a U.S. oil drilling rig count of 499, as of the week ended Jan. 12 — a far cry from the four-digit rig counts last seen in 2015. The weekly U.S. oil drilling rig count last topped 1,000 on Feb. 20, 2015, at 1,019. In other words, the US is producing more oil than ever with a lot fewer rigs in operation. The surge in production has also led the U.S. to become a “major oil exporter, opening up new markets for companies to sell the increased production despite limited increases in U.S. demand. However, a recent rise in tanker rates has apparently resulted in US crude oil no longer being price-competitive into Asia. The latest EIA data suggests that 42% of US crude oil exports went to Asia in October, or roughly 1.7 million barrels per day. Source Market Watch

Record Amount of Commercial Real Estate Debt Coming Due: In 2023, $541 billion in debt backed by office buildings, hotels, apartments and other types of commercial real estate came due, the highest amount ever for a single year, according to the data firm Trepp. Commercial-debt maturities are expected to continue rising, with more than $2.2 trillion coming due between now and the end of 2027, Trepp said. In 2022 and 2023, many owners were able to exercise one- or two-year extensions built into their original loans. Now, those extensions are burning off. The decline in inflation and interest rates in recent months has eased the pain but most borrowers still have to refinance at much higher rates than those of their maturing loans. That is compelling many borrowers to confront the higher rate environment—along with higher vacancies and weakening cash flows—which is depressing property values. The weak property sales market has complicated workout negotiations, making it harder for borrowers and lenders to agree on what properties are worth. Borrowers tend to have a more optimistic view on values than lenders, who are often looking at worst-case scenarios, said Thaddeus Wilson, a partner at the law firm King & Spalding who has been involved in about 50 workout negotiations in the past year. “At some point borrowers are going to have to come to grips that their lenders might be right about the values and look at it from the worst-case scenario,” he said. Source WSJ

NEW Car Buyers Starting to See Better Deals: Inventories on dealer lots, both new and used, are climbing toward pre-COVID levels, analysts say, which is starting to put downward pressure on prices. Carmakers are starting to increase incentives such as discounts to sticker prices or lower interest rates provided by captive lending arms, to boost sales. Though new vehicle prices are up +20% on average from late 2019 and used vehicle prices are up more than +35%, it still looks like 2024 could be the moment for car buyers to press their advantage when shopping for fresh wheels.  Source Axios

China’s Population Decline Accelerates:  Births in China dropped by more than -500,000 last year to just over 9 million in total, accelerating the decline in the country’s population as women shrugged off the government’s exhortations to reproduce. The number of newborns has gone into free fall over the past several years. Official figures released yesterday showed that China had fewer than half the number of births in 2023 than the country did in 2016 after China abolished the one-child policy. The latest number points to a fertility rate that is close to 1.0, a level considered by demographers as ultralow. The worsening demographic gloom has taken on increasing urgency for Beijing. The country hit a historic turning point in 2022, marking the first year the population shrank since the starvation years in the early 1960s. Over the past year, China’s population dropped by -2.08 million, more than twice the drop in 2022. The Chinese population declined by over -850,000 people in 2022. China ended 2023 with 1.410 billion people, the National Bureau of Statistics said Wednesday. The fresh data adds to concerns that the world's No.2 economy's growth prospects are diminishing due to fewer workers and consumers, while the rising costs of elderly care and retirement benefits put more strain on indebted local governments. China's population aged 60-and-over reached 296.97 million in 2023, about 21.1% of its total population. Source WSJ and Reuters

Silicon Valley Billionaires Reveal Details of Controversial Development: Promoters of a secretive Silicon Valley-backed ballot initiative to build a new city on farmland between Sacramento and San Francisco are releasing more details of their plan as they submit paperwork Wednesday to qualify for the November election. California Forever, the company that stealthily snapped up more than $800 million of Solano County land in recent years, envisions a new community on roughly 30 square miles (75 square kilometers) between Travis Air Force Base and the tiny city of Rio Vista, according to a presentation by the group. The development would start with nearly 20,000 homes for 50,000 residents. It could grow to 400,000 people — which is nearly the current population of Solano County — but only if the project creates at least 15,000 jobs that pay above average wages, the group’s backers say. But none of that can happen without approval from county voters, who in 1984 backed protections against turning farmland into urban space. Source Fortune

FDA Clears AI-Powered Handheld Device That Can Detect Skin Cancer: The FDA has cleared DermaSensor’s first-of-its-kind handheld device that uses artificial intelligence to non-invasively detect skin cancer, the Miami-based device maker announced Wednesday. Physicians may use the device to take spectral recordings of a suspicious skin lesion, which then goes through an AI-powered algorithm to deliver an immediate result, according to DermaSensor’s website. The device can detect all three common types of skin cancer—basal cell carcinoma, squamous cell carcinoma and melanoma, which is the most deadly form of skin cancer—and signals to physicians whether a suspicious lesion should be investigated further. The device will be priced through a subscription model at $199 a month for five patients or $399 a month for unlimited use.  Source Forbes

How the US is Breaking Oil Production Records with Fewer Drilling Rigs: U.S. oil production has been holding at or near record highs since October, topping the previous peak from 2020, even though the number of active domestic oil drilling rigs is down by nearly -30% from four years ago. Strength in oil prices and gains in investment and output efficiency have contributed to that climb, though analysts see a potential slowdown in output growth ahead. U.S. oil production has “nearly tripled in the last 15 years, fueled by advances in drilling and fracking technology and investments in the early 2010s due to sustained higher oil prices and favorable government policies,” said David Carter, industrials senior analyst with assurance, tax and consulting firm RSM US. Since 2010, one of the biggest developments in oil production efficiency was the “increase in horizontal drilling, called laterals, and fracking, said Carter. Oil E&P companies are also using “artificial intelligence and machine learning for optimization of exploration,” Carter said. Adoption of these technologies is likely to continue to “expand and mature as more use cases are discovered and optimized themselves. Source Market Watch

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