Recession fears increase as Philly Fed contracts

BY Janne Muta

|April 21, 2023

Equity indices fell as mixed earnings results and negative economic data made investors cautious. The Philly Fed manufacturing index, for April, showed a greater contraction than expected and Tesla's falling profitability together with higher-than-estimated jobless claims also contributed to investor concern about the economy.

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The worry is that the economy could be heading into a recession. While stocks weakened the Treasury bonds traded higher pressuring the yields. The benchmark 10-year yield fell to 3.546%. The European stocks also traded lower together with USOIL (as expected per yesterday’s analysis). A drop in demand forecasts and a strengthening dollar weighed on the oil market.

Furthermore, the unexpected contraction in the Philly Fed index suggests consumer and business spending is slowing more quickly than expected and the weekly claims rose higher than expected. The Federal Reserve is monitoring the labour market closely and sees it as a factor in rate-hiking decisions. However, the Fed is prepared for unemployment to rise and remain hawkish this year.No pivot from aggressive monetary policy is expected before 2024.

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While the daily longer-term uptrend in DAX is still in force those that trade DAX intraday should notice that Dax has lost upside momentum since my last analysis (the April 19th report). The market failed to push above the 15 917 level and then broke a key support level (15 826). This created a bearish double-top formation and now the neckline of the formation (at 15 826) has been penetrated. Also, we now have a daily close below the previous day’s low and a penetration of yesterday’s low. These are short-term bearish indications.

The neckline (15 826) proved to be too much to the bulls in the US session yesterday. If it continues to hold the market is likely to trade down to 15 620. Above the neckline look for a move to 15 850 or so. While DAX a few days ago showed relative strength (vs. Dow and Nasdaq) the market has over the last two days been roughly as weak as Nasdaq. Both DJ and S&P 500 have declined less than DAX.

The loss of relative strength in a less liquid market is a sign that institutional investors are becoming more careful. When markets are in a risk-on mode the less liquid markets like DAX tend to rally more strongly (relative to the S&P500 for instance) as new money flows into the markets and chases the limited number of shares available in the market. The opposite happens when investors start to doubt the immediate upside in the stock markets in general and sell shares. Then the less liquid markets again move lower more quickly than the liquid markets as the lower liquidity means there are fewer buyers available. Hope this helps you to understand the concept of relative strength and the demand and supply dynamics behind it.

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NZDUSD remains bearish below 0.6224. Above the level, the market could trade to 0.6300 or so. The nearest key resistance level is at 0.6203. The lower-than-expected CPI reading yesterday is still pressuring the market and we might NZDUSD testing the March low at 0.6084. Other support and resistance levels to pay attention to are 0.6140, 0.6203 and 0.6315.

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USOIL remains bearish below 81.50 and has been trading lower since our last report on the market yesterday. Above the level, the market would be likely to trade to 82.50. The market probably trades down to the 50% Fibonacci retracement level (74.40). This is a measure move target given by the range width above the 79.37 support level.

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USDCAD continued to rally as the USOIL stays weak. The currency pair is approaching a key resistance level at 1.3553. Keep an eye on price action around this level to see if there are signs of profit-taking or whether the bulls stay in charge. The nearest key price levels to monitor are 1.3300, 1.3360, 1.3420, 13488 and 1.3553.

The Next Main Risk Events

  • GBP Flash Manufacturing PMI
  • GBP Flash Services PMI
  • CAD Core Retail Sales m/m
  • CAD Retail Sales m/m
  • USD Flash Manufacturing PMI
  • USD Flash Services PMI

For more information and details see the TIOmarkets economic calendar.

Trade Safe!

Janne Muta
Chief Market Analyst

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Janne Muta

Janne Muta holds an M.Sc in finance and has over 20 years experience in analysing and trading the financial markets.

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