Welcome to 2023... traders and investors are heavily debating the Chinese reopening.

Bulls argue there is massive pent-up demand as Chinese consumers have been restrained for almost three years. There are also reports circulating that the Chinese consumer is sitting on nearly double the amount of money they had prior to Covid and their interest rates are the lowest they have been.

Meaning the underlying landscape might be right for explosive growth inside China. Bears on the other hand argue that the Chinese reopening could create increasing inflationary problems around the world as the Chinese consumer comes out of hibernation.

Bears also argue that various new strains of Covid could now start circulating and making their way out of China causing even greater concern and complications.

In fact, some argue that China's reopening will cause a major uptick in global demand for various commodities and other goods but at the same time we could see some major bottlenecks again in the supply chain as Covid spreads more easily and rapidly among the Chinese workers.

In other words, many Chinese factories might be very shorthanded for several months as the virus works its way through the Chinese people. The other global wild-card is obviously Russia and how Putin opts to play his hand regarding Ukraine and the West.

Currently, I am seeing no significant signs of an end to the war with heavy fighting continuing in the eastern and southern part of Ukraine. At the same time, Russian leaders are still making demands for the “demilitarization and denazification” of Ukraine, which experts say really means that they want a regime change in Ukraine. Russian President Vladimir Putin has recently claimed he is open to peace talks but experts believe this is just a tactic to mislead the West and possibly win Russia some concessions on sanctions.

There are also some worries that Belarus may be leaning toward joining Russia in its fight. However, the Belarusian military isn't very large or sophisticated so this may not be as big a threat as it might appear on the surface. The bigger worry is still how far a desperate Putin might go to save face in a war that has not gone as planned and looks increasingly less likely to result in any material gains for Russia.

Here at home, I want to argue that we have seen peak hawkishness from the Fed, but perhaps not peak inflation, especially if the Chinese reopening causes the demand and manufacturing complications many are suggesting.

Let's. keep in mind, stock indexes are coming off a rough 2022 that left both the S&P 500 and Nasdaq with double-digit losses. In fact, the energy sector was the only S&P 500 sector to end 2022 higher, with a gain of +59.0%.

Bulls believe the bleeding will end in 2023, though, pointing to expectations for the Federal Reserve to end its tightening campaign by the second half of the year, as well as more optimistic outlooks for US and global economic growth.

Many bulls believe that negative sentiment has actually gone too far and that corporate earnings in the first half of 2023 won't be nearly as bad as investors are perhaps braced for thanks to companies' aggressive cost cutting, and still strong consumer spending.

On the other hand, bears continue to argue that earnings expectations remain overly optimistic in the face of a hawkish Fed that has vowed to keep rates higher for longer in order to tame inflation that remains stubbornly elevated.

The latest PCE Price Index shows year-over-year inflation was up +5.5% in November while "core" PCE, one of the Fed's favorite gauges, was up +4.7%, both far above the Fed's target rate of +2%. While those rates did mark meaningful declines from the previous month, bears believe the key areas currently driving inflation - housing and service sector wages - will be much tougher to rein in and consequently work to buoy inflation.

Several key pieces of economic data are due out this week that could have a big influence on investor expectations for Fed policy in 2023. One of the top highlights will be the "minutes" from the Fed's December meeting, due out on Wednesday.

Investors will be looking for signs of growing divisions between Fed officials over the pace and scale of their tightening campaign. Some Fed officials have expressed concerns about raising rates too high, too fast, and not giving the work done so far enough time to filter through the system.

Over-tightening runs the risk of deepening any economic slowdown that results from the Fed's actions. At the same time, other Fed officials are focused on the risks of not tightening enough, which could extend the high inflation/high interest rate era even longer.

Investors will get updates on inflation trends via ISM Manufacturing on Wednesday and ISM Services on Friday.

Meanwhile fresh insights into the labor market will come from the Job Openings and Labor Turnover Survey on Wednesday and the December Employment Report on Friday.

Data today includes PMI Manufacturing and Construction Spending.

On the earnings front, Thursday brings this week's key releases with Conagra, Constellation Brands, and Walgreens scheduled to report.

Personally, I've lightened up on some of my short hedges as we start the new year. I still think there is more downside ahead, but perhaps we could see some money coming off the sidelines and being put to work early in 2023.

Keep in mind, since 1928, the S&P 500 has experienced 21 bear markets (not including the current downturn). The average length of a bear market is about 388 days. The S&P 500 began its descent in early January, but it didn't officially enter a bear market until June 13, 2022. For reference, we are currently just over 200 days into this bear market. In case you are wondering, the longest bear market in history occurred in the wake of the dot-com bubble bursting in the early 2000s, lasting a total of 929 days. The 208-09 bear market lasted 517 days. The 1987 bear market lasted 101 days. The 1980-82 bear market lasted 622 days. The 73-74 bear market lasted 630 days.

Monthly Mortgage Payments Nearly 60% Higher Than a Year Ago: In January of 2022, the payment on a median-priced home was $1,443 after putting 10% down. Today it’s $2,285, or $842 per month more, according to calculations Realtor.com exclusively provided Yahoo Finance. The payment now eats up 30.2% of a buyer’s monthly household income, or nearly 50% more than in January when it took up just 20.3% of their income. If sellers don’t adjust their pricing expectations, and mortgage rates don’t budge from 7% next year, homebuyer affordability could remain at its worst level since 1985, economists from independent research firm Capital Economics said. So far, though, it appears the sellers who remain in the market are getting the message as the share of homes with a price reduction increased to 19.6% in November, up from 9.2% a year earlier, data from Realtor.com showed. Some 35% of builders also cut their listing prices in December, according to the NAHB, slightly down from 36% the previous month. Source YahooFinance

What to Expect for Gas Prices in 2023? After a tumultuous year for gas prices where we saw the highest ever yearly national average price for regular gasoline at +$3.95per gallon, GasBuddy's 2023 Fuel Outlook has the national average dropping by nearly -50 cents this year. Thanks to continuing improvements in refinery capacity they believe we should experience some relief, though high levels of uncertainty remain amidst Russia’s ongoing war on Ukraine and continuing economic concerns. According to the data, a +$4 national average still remains a possibility ahead of and during the summer driving season, but overall, Americans will spend an estimated $470.8 billion on gasoline in 2023, down -$55 billion from 2022 and the estimated yearly household spend on gasoline is also expected to fall by -$277 to $2,471 Source Gas Buddy

Stingray ZL-1 Could Become Most Expensive Vette Ever Sold: Corvettes may be special, but they're far from rare unless you're talking about the C3 ZL-1, arguably the king of rare 'Vettes. At the time, it was the most powerful Corvette ever, sporting an impressive 560-horsepower aluminum big block. Only two were built, and one of them is now coming up for sale for the first time in three decades. It's also a convertible with positively zero rollover protection, making it a very tempting deathtrap if there ever was one. I'm told it was restored in 2014 and RM Sothebys, who is auctioning the car off in Arizona in a few weeks, estimates its hammer price will land somewhere between $2.6 million and $3 million. The current record-holder is a 1967 Chevy Corvette L88 Coupe, a C2, which sold at auction in 2014 for $3.85 million. Source The Drive

Treasuries Post Biggest Annual Loss Ever as Inflation Takes Toll: The US Treasury market notched a record annual loss in 2022, fueled by inflation pressures that prompted the Federal Reserve to hike its overnight benchmark by more than four percentage points. Yields peaked in October or November, then retreated as inflation gauges began to show moderation and Fed officials slowed the pace of policy tightening. The yield curve inverted, with rates for 5-year notes first exceeding those for 30-year securities in March, while the gap between two- and 10-year yields also flipped. Ultimately, these inversions reached historic extremes, signifying that investors expect high short-term yields to do economic damage. The inversion of the two- to 10-year curve hit as much as 85.2 basis points on Dec. 7, before ending the year at around 56 basis points. The Bloomberg US Treasury Index delivered a negative return of -12.5%, its second straight full-year loss and the biggest in its four-decade history. Source Bloomberg

Companies Offer Big Raises to Retain Workers: Workers who stay put in their jobs are getting their heftiest pay raises in decades, a factor putting pressure on inflation. Wages for workers who stayed at their jobs were up +5.5% in November from a year earlier, averaged over 12 months, according to the Federal Reserve Bank of Atlanta. That was up from +3.7% annual growth in January 2022 and the highest increase in 25 years of record-keeping. Faster wage growth is contributing to historically high inflation, as some companies pass along price increases to compensate for their increased labor costs. Employees who changed companies, job duties or occupations saw even greater wage gains of 7.7% in November from a year earlier. The prospect that employees might leave for bigger paychecks is a main reason companies are raising wages for existing employees. Source WSJ

States Where Minimum Wage Will Increase in 2023: As the calendar turns to 2023, workers in more than half of all states have something to look forward to this year: a higher minimum wage. That’s occurring as the federal minimum wage stands pat at $7.25 per hour — the same rate since 2009. But many states and cities have put their own rates in place. A total of 26 states (in blue below) have announced that higher minimum wages will be introduced during 2023, with one more state likely to see an adjustment in July, according to research from payroll experts at Wolters Kluwer Legal & Regulatory U.S. Meanwhile, 23 states and Washington, D.C., according to the Economic Policy Institute, will implement higher minimum wages on Jan. 1. Those increases, which will range from 23 cents to $1.50 per hour, will affect 8 million workers. Source CNBC

1 33
US Home Prices Still Up Nearly +40% Despite Softening Market: For 124 consecutive months, spanning the bottom of the previous bust in February 2012 to the top of the Pandemic Housing Boom in June 2022, the seasonally adjusted Case-Shiller National Home Price Index reported positive home price growth. Now we’re in a new streak: Four consecutive months of U.S. home price declines. Last week, we learned that U.S. home prices as measured by the Case-Shiller National Home Price Index fell -0.3% in October. In total, U.S. home prices are down -2.4% since peaking in June. On one hand, a -2.4% decline in U.S. home prices sounds like a drop in the bucket. On the other hand, it’s already big enough to count as the the second-biggest home price correction of the post–World War II era. It’s just above the -2.2% drop between May 1990 and April 1991, however, far below the -26% peak-to-trough decline that occurred between 2007 and 2012. While U.S. home prices are falling, they're still up big-time. In fact, October 2022 home prices are +38.1% above March 2020 levels. Recent research published by the Fed suggests that the Pandemic Housing Boom didn't just help to drive up pandemic inflation—it was one of the biggest culprits Source Fortune

IRS Pauses Rule Requiring People to Report PayPal, Venmo Transactions Over $600: To avert taxpayer confusion in the upcoming tax season, the IRS is delaying a rule that would have required e-commerce sites and payment platforms like eBay, Etsy, and PayPal to send out tax paperwork to a much wider swath of people in 2023. Payment platforms were supposed to send tax forms, known as a Form 1099-K, to people who received at least $600 via these types of sites and payment platforms beginning this year. The forms are typically triggered when a recipient receives at least $20,000 and has had at least 200 transactions. E-Commerce businesses, accountants and others pushed for a higher threshold, saying the batch of paperwork would be an administrative headache for companies and the backlogged IRS, and also stir up confusion among taxpayers. These groups applauded the pause announced Friday. Source Barrons

We have alternatives that are low in correlation to traditional stock & bond portfolios. They are liquid and transparent. Minimums and fee structures vary and some are performance based only. Returns we can share are NET of Fees.

If you want to learn more, just let me know what works to learn more about your needs.

Schedule A Call Now

Futures trading is speculative and involves the potential loss of investment. Past results are not necessarily indicative of future results. Futures trading is not suitable for all investors.

Nell Sloane, Capital Trading Group, LLLP is not affiliated with nor do they endorse, sponsor, or recommend any product or service advertised herein, unless otherwise specifically noted.

CTG Daily Commentary is published by Capital Trading Group, LLLP and Nell Sloane is the editor of this publication. The information contained herein was taken from financial information sources deemed to be reliable and accurate at the time it was published, but changes in the marketplace may cause this information to become out dated and obsolete.

It should be noted that Capital Trading Group, LLLP nor Nell Sloane has verified the completeness of the information contained herein. Statements of opinion and recommendations, will be introduced as such, and generally reflect the judgment and opinions of Nell Sloane, these opinions may change at any time without written notice, and Capital Trading Group, LLLP assumes no duty or responsibility to update you regarding any changes. Market opinions contained herein are intended as general observations and are not intended as specific investment advice.

Any references to products offered by Capital Trading Group, LLLP are not a solicitation for any investment. Readers are urged to contact your account representative for more information about the unique risks associated with futures trading and we encourage you to review all disclosures before making any decision to invest. This electronic newsletter does not constitute an offer of sales of any securities. Nell Sloane, Capital Trading Group, LLP and their officers, directors, and/or employees may or may not have investments in markets or programs mentioned herein.