Mid-Market Update: Stocks fade cooling German inflation report as bets on more Fed rate hikes grow, Fed’s Barkin, Disney’s restructuring plan, Oil lower on growth concerns, Gold softer, Crypto declines, Kraken in focus

This market doesn’t make any sense right now. Inflation most likely won’t get conquered if the economy doesn’t break. Disinflation trends remain in place but it will be hard for them to continue with a strong labor market and as the economy keeps on growing. We’ve seen commodities and goods price declines, but core services remain tricky.  The Fed won’t stop raising rates till core PCE is trending sharply lower and that might not happen until the summer.

US stocks initially rallied as both German inflation cooled and on some positive earnings, which was led by Disney shares. Wall Street couldn’t keep the upbeat mood however as ​ some traders placed bets that the Fed will have to do a lot more tightening than what Wall Street is pricing in.  Arguments are being made for the Fed to raise rates to 6%, with one strategist calling for a move towards 8%. A month ago, it seemed very likely that the Fed would be done raising rates in March and now that view could be changing. ​

US Data

First-time claims for weekly unemployment benefits rose by 13,000 to 196,000, the first increase in six weeks.  Continuing claims climbed to 1.688 million, but still remains near low levels that support the idea that the labor market remains strong.  The economy is slowly softening, but the labor market is not cooling quickly enough to support an easing of wage pressures.

Fed

Fed’s Barkin reminded traders that inflation is still elevated and that is why the Fed will need to stay the course. Some investors are ramping up bets that we could see a whole lot more Fed tightening, but overnight index swaps are still pricing in easing by the end of the year.  If inflation ends up being hotter-than-expected, the Fed will most likely go back to the hawkish playbook and signal more work needs to be done. ​

Disney

Disney shares are rallying after delivering a strong profit beat and announcing a major restructuring that will slash $5.5 billion in costs.  The focus on profitability is being met with open arms on Wall Street.  Disney also announced plans to reduce its workforce by 7,000 jobs.

Disney + is still losing money, which is driving the cash flow worries, and they aren’t seeing subscriber growth.  I can’t imagine subscriber growth will improve if they are cutting back on content, so this impressive rally might not be long-lasting.

Oil

Crude prices are getting dragged down as the Treasury yield curve inversion new extreme suggests a broad-based slowdown is coming.  As inflation declines across Europe and the US, risks remain elevated that central banks will need to still deliver more tightening than what markets are pricing in.

Energy traders are still waiting to see how robust China’s recovery will be.  Air travel demand should pick up but some hesitancy from Chinese passengers over COVID fears remain and on high costs.

WTI crude looks like it might be stuck below the $80 level until we have a clearer picture of China’s crude demand outlook and if risk appetite can hold up if we have a hotter-than-expected Valentine’s Day inflation report.

Gold

Gold prices are lower as investors see a robust labor market that could complicate the disinflation process.  The risks of more than a couple quarter-point rate rises are growing and if the market starts to price that, gold could be under pressure a little while longer.  Eventually slower growth and mounting earnings risk will trigger safe-haven flows back into gold, but we are not yet at that moment.

Crypto

Bitcoin is lower as some investors start betting on more ongoing Fed rate increases.  Parts of Wall Street are getting concerned that they may have been too optimistic with how high rates will go. ​

A lot of crypto traders are also awaiting to see if harsh penalties from the SEC will come towards Kraken, one of the major crypto exchanges. Regulation will undoubtedly be hard for Kraken and other exchanges, especially as they have a short window for working with regulators.  One big fear since FTX was if we would see another major crypto player go down.  At the end of last year, SEC Chair Gensler said “the runway is getting shorter” for crypto companies to register with the agency.

Selling crypto to Americans will be accompanied with very strict regulatory guidelines and penalties will undoubtedly be dealt for what was done in the past. The cryptoverse is getting cleaned up and this headline about Kraken’s probe is not being greeted with the same panic selling we saw a couple months ago.  Kraken is a big player, but it seems this probe on offering unregistered securities could have a settlement, which will just pave the way for better guidance on how operations should be going forward. How deep this probe is still unknown as both the SEC and Kraken have yet to comment. ​ ​

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