US stocks were unable to keep the relentless rally going after a soft retail sales report was accompanied with growing concerns the current COVID wave will make this a “difficult winter”. Wall Street does not have a catalyst to keep the climb going to uncharted territory, but they do have a plethora of short-term risks. Bearish sentiment is persisting as the Fed has not provided a clear signal that they will do more at the December meeting, on rising doubts that the Biden administration will get anything meaningful passed when they take office, and on concerns of what President Trump will do with the remainder of his term.
Republicans are not budging on stimulus talks and this could be a sign of what President-elect Biden should expect next year. The current coronavirus surge will undoubtedly trigger more shutdowns that will cripple many small businesses that did everything possible to survive.
Stocks attempted to stage a comeback leading up to Powell, but that quickly faded after he did not deliver a clear hint that more QE was coming.
Fed Chair Powell provided a laundry list of concerns on why Congress needs to act but did not signal the Fed was ready to increase QE or that they were ready to adjust their bond-buying program. The Fed is nowhere near done supporting the economy and will likely extend most of their emergency lending facilities that are about to expire. Powell reminded markets that labor market recovery is incomplete as over 10-million Americans still need work, which is more than the peak of the global financial crisis.
The Fed knows they could signal they are ready to act, but they want to keep the pressure on Congress to do their part. The December policy meeting will likely see the introduction of yield curve control and possibly an increase with their asset purchases.
To sum up, deceleration was the word best used to describe the October US retail sales report. The consumer is still spending, but lockdowns and no signs of stimulus for millions of Americans is raising concerns retail sales will decline even as the holidays near. Benefits are expiring, COVID-19 lockdowns will lead to job losses and that will disrupt the spending habits for millions of Americans.
Currency traders are seeking shelter away from the US dollar after Fed Chair Powell signaled recovery is slowing and that they are nowhere near done supporting the economic recovery. Powell didn’t give us anything concrete today, but he outlined a strong case to expect that they will be the last central bank to end easing. The dollar will become a funding currency, but we may see limited FX moves until the Fed delivers more stimulus.
Crude prices rallied after the Trump administration announced further drawdown of troops in Afghanistan and Iraq. Instability in the region is a growing concern for some top military advisers. President Trump already sought options for attacking Iran over their nuclear program earlier in the week.
Any escalation in the Middle East region could be a catalyst needed to help take Brent above its tight trading range that has been in place since the summer. Rising lockdowns across Europe and the US is the only thing preventing oil prices from surging higher.
Gold remains anchored just below the $1900 level. Disappointing retail sales raises concerns that the slowing US economy is about to get much worse. Lockdowns are spreading across the US and with no immediate signs that Congress is ready to break the stimulus stalemate, gold will continue to struggle to rise.
Gold’s best friend is stimulus and right now it seems she went home for winter break. Gold didn’t react much to Fed Chair Powell as he didn’t give any solid signs on what they will do at the next policy meeting.
Gold’s bullish outlook remains in place because the US and Europe will continue to deliver fresh support to large parts of their respective economies. Germany’s government gave the auto industry 5 billion euros in aid and that will become a growing theme for the next few months.