Recession bound, Yellen restarts talks with China, BOJ, oil higher, gold holds $1900, bitcoin weakens

US stocks declined after traders digested softer economic readings that are starting to raise growth concerns. ​ The ‘bad news is good news’ rally ran out of steam as investors started to realize a recession is coming.

US data

A swathe of economic data confirmed that disinflation trends clearly remain in place. ​ Recession-bound risks are rising after a larger-than-expected PPI decline, a major downshift in spending, and plunging industrial production.

This round of falling PPI pressures complimented last week’s inflation report. ​ PPI for final demand dropped 0.5%, a bigger decrease than the eyed decline of 0.1%. ​ Retail sales for December dropped 1.1%, worse than the expected fall of 0.9%, and a touch lower than the downwardly revised prior of -1.0%. ​ Industrial production for December weakened by 0.7%, while manufacturing plunged by 1.3%. ​ The weather might have impacted this data, so if next month’s reading doesn’t rebound, the economy could be in worse shape than many are thinking.

The economy is clearly in slowdown mode and growth fears will be hard to shake going forward. ​

Yellen

According to the Treasury, Treasury Secretary Yellen had a candid, substantive, and constructive meeting with Chinese Vice Premier Liu He. ​ The Treasury’s statement noted, “Both sides agreed it is important for the functioning of the global economy to further enhance communication around macroeconomic and financial issues.”

It looks like we are going to see an attempt to repair US-China relationships, which should be somewhat positive for risk appetite if we see any olive branches offered. As long as we see a de-escalation in tensions amongst the US and China, that is a good thing.

BOJ

For anyone that missed last night’s BOJ decision, they are waking up to sharply lower Japanese 10-year bond yields. Financial markets were testing the BOJ before the policy decision by sending yields above the upper boundaries of yield curve control (YCC). Everyone knew they would keep interest rates on hold but some traders were stunned by the BOJ decision to stick to their yield curve control strategy.

Japanese 10-year government bond yields tumbled from 0.50% to 0.40% following the decision. The Japanese yen initially tumbled following the decision but recovered losses as traders quickly shifted focus to Kuroda’s final meeting in March. ​ The BOJ didn’t have a major policy shift yesterday, but chances are high they will soon.

Oil

Oil prices continue to rally on Chinese reopening momentum and on US soft landing hopes. ​ Short-term crude demand expectations will remain volatile as the outlook for the world’s two largest economies remains up in the air. The oil market still seems like it is headed towards being balanced, but some concerns are growing for the US outlook.

Gold

Gold prices softened but are still holding onto the $1900 level. ​ The end of Fed tightening is approaching us, but a shallow recession might not be supportive of inflows for gold as that might lead to a stronger dollar. ​ Gold’s rally looks like it will take a break here, but it could resume if yields continue to slide.

Crypto

Bitcoin prices are weakening as growth fears have Wall Street worried a soft landing might not happen. The outlook for crypto has improved dramatically over the past few weeks, but the current rebound appears to finally be facing some resistance. ​ ​

The crypto space continues to get cleaned up as the Department of Justice announced that the founder and majority owner of Bitzlato, a cryptocurrency exchange, has been charged with unlicensed money transmitting. The impact of law enforcement cleaning up the crypto space will soon be positive for long-term growth. Everyone knows there are too many bad players still out there and it will take time to clean it all up. ​

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