Original Title: "LD Capital: 12.3 Weekly Report - Retail Investors' Bullish Sentiment Soars, Deviating from Economic Fundamentals for the First Time in 3 Years"

Source: LD Capital

Key Points

·The industries most sensitive to interest rate cuts continued to lead the way in performance last week, while the technology and communication sectors, which had risen more than 50% at one point this year, performed the worst. The bond market saw its best monthly return in the past 30 years.

On the data front, both the US and global GDP growth have slowed down, with a slight deterioration in the momentum of US manufacturing. However, consumer spending continues to grow.

·The Federal Reserve's Waller has issued a hint of a rate cut in advance, while the Fed's Timiraos has written that the Fed's rate hike may have ended, and Powell continues to be "stubborn" but the market is not buying it;

·OPEC+ expands production cuts, but oil prices fall instead. This is mainly because this meeting is likely to be the limit of OPEC's self-restraint, and there will be no further production cuts. The market is concerned that there may be a market share battle next year.

·Compared to 2023, the drag of fiscal policy on the US economy in 2024 is expected to be greater. DB predicts that nominal GDP growth will be dragged down by about 0.8%.

·The entry of the cryptocurrency market is currently not strictly restricted, with a penetration rate of nearly 20% in the United States, almost on par with stocks. Even if ETFs are approved, the incremental impact should be limited. Whether the Bitcoin ETF fails or succeeds in January, it may mean the appearance of a short-term top.

·The total amount of stock positions has further increased to the 63rd percentile this week, with systematic investors maintaining a neutral position and subjective investors holding a higher position.

·The net long position of US stocks in the futures market has risen for the third consecutive week, but it is also the first time since the end of 2019 that there has been a serious deviation from the economic fundamentals.

·AAII survey shows that retail investors are highly optimistic, with the difference between bullish and bearish sentiment reaching the historical 91st percentile;

·The demand for bullish gold options is exceptionally high, with put-call skew approaching historical extremes;

·This week, attention is focused on non-farm employment data. Considering the seasonal factors and the return of strikes in November, the expected number of 175,000 is not high. A slightly lower than expected number may trigger further market speculation on interest rate cuts, while a slightly higher than expected number will provide sufficient reasons for the market to convince itself.

Market and Data Review

Over the past week, the market was led by cyclical industries and small-cap stocks. In general, industries that are most sensitive to interest rate cuts have performed well, including cryptocurrencies, industrial metals, and gold. The following chart shows the performance of major stock indices over the past week, with the small-cap Russell 2000 (RUT) representing a notable acceleration in the latter half of the week.

Typical interest rate-sensitive industries include real estate, with the sector rising more than 5% in a single week, making it the best-performing sector in the S&P industry index. It has risen 14.5% in the past month. Other industries, including financial services and non-essential consumer goods, have also risen more than 11% in the past month. Meanwhile, the best-performing technology and communication sectors this year have performed the worst, with the communication sector even falling 3% last week, becoming the only sector to decline:

The communication sector (S5TELS) has recently experienced a counter-trend pullback, while the technology sector (S5INFT) has been stagnant. However, both sectors have still maintained a return of over 2 times the market this year:

The bond market has achieved its best monthly return in the past 30 years:

The current implied pricing in the futures market suggests a 28 basis point rate cut in the next six months, indicating a rate cut before May. Additionally, there is an implied 99 basis point rate cut in the next 12 months, which suggests approximately four rate cuts next year. This expectation is relatively advanced, and we believe that there is a possibility that the Fed will at least verbally suppress this expectation (after the December meeting), despite some officials beginning to turn dovish. However, it is difficult to expect officials to consistently push this expectation.

From a data perspective, the growth of GDP in the United States and globally has slowed down, and the momentum of US manufacturing has slightly deteriorated. However, consumer spending continues to grow. Both core inflation and GDP growth rate in the United States have declined, but as the market is more concerned about the former, the central bank and market optimism are still supported for the time being.

The GDPNow forecast for fourth-quarter growth from the Atlanta Fed was lowered from 2.1% to 1.8% last week:

Despite the global manufacturing PMI rising to 49.3 in November, the highest in six months, the global PMI has been below 50 for 15 consecutive months, creating the longest contraction period since the 2008 financial crisis.

The US manufacturing PMI has been contracting for 13 consecutive months (below 50), marking the longest contraction period in the past 20 years since the burst of the dot-com bubble crisis:

Overall, the potential inflation pressure in the United States continues to ease, and the market generally expects inflation to continue to trend towards moderation in the coming months, although not in a linear decline. The core inflation index for PCE in October, which was released last week, continued to decline, rising 3.5% year-on-year, getting closer to the Fed's target of 2%. The annualized core inflation for the past 3 and 6 months were 2.4% and 2.5%, respectively, significantly lower than earlier highs this year.

Personal consumption on a month-on-month basis slowed down from 0.7% in September to 0.2%. However, the annual growth rate is approximately 5.2%, which is the same as the previous three months.

The nominal inflation figure for the Eurozone in November fell to 2.4%, far below the peak of 10.6%, and this decline exceeded market expectations:

More hints of interest rate cuts

The Federal Reserve's Waller stated last week that if progress continues to be made in suppressing inflation in the coming months, it may be reasonable to begin cutting interest rates in the first half of 2024. These comments sharply contrast with Chairman Powell's response to questions about interest rate cuts at the November FOMC meeting, when he emphasized that the committee is not even considering cutting rates at this time.

The Federal Reserve's Timiraos also wrote last week that the Fed's rate hikes may have ended, but officials are reluctant to say so. The Fed will extend its rate hike pause until January next year. This means that at the meeting on December 12-13, the Fed will focus on how long it is still possible to send a signal to raise interest rates. Officials are unlikely to eliminate this so-called tightening bias at this meeting, which will be the necessary first step before considering a rate cut. This is an early indication that the December meeting will continue to remain unchanged, but with a hawkish tone.

According to market predictions, by June of next year, the year-on-year core PCE inflation rate should have convincingly fallen below 3%, and the unemployment rate will rise to nearly 4.5%, indicating a mild recessionary environment. The Fed has little reason to continue to persist.

On Friday, Powell poured cold water on the interest rate cut, saying it was too early to judge when to ease and further tightening may be needed when ready. However, he also mentioned that the impact of monetary policy on the economic situation has a lag, and the Fed's monetary tightening policy may not have fully shown its overall impact. The market clearly ignored his "tough talk" and focused more on the pressure on Fed's policy shift brought by the weak economic situation. In terms of market performance, the price of US bonds rebounded significantly and yields plunged on Friday.

This Week's Focus

The latest turning point may be Friday's non-farm payroll report, with the market expecting 175,000 people, slightly higher than October's 150,000. There may be some disturbance to the employment trend due to the return of some strikers in November and the seasonal factor of holiday recruitment (such as retail and logistics) in November, which may increase the number of recruits during the holiday season. It should be noted that even if the November data is strong, it cannot conceal the overall softening trend of the job market. High-frequency weekly unemployment benefit data can also confirm this:

Due to the low expectations for non-farm employment figures, a slightly lower-than-expected number may trigger further associations with interest rate cuts in the market, while a slightly higher-than-expected number may give bulls reasons to convince themselves. However, a significantly lower-than-expected number may lead to speculation of a recession. In addition, the market predicts that the unemployment rate will remain unchanged at 3.9% between October and November; it is expected that the average hourly wage in November will increase by 0.3% compared to the previous value of 0.2%, but the year-on-year growth rate will continue to decline to 4.0%, down from the previous value of 4.1%.

Earlier on Tuesday, there was US job vacancy data, which was expected to drop from the previous 9.553 million to 9.35 million. Despite significant fluctuations in job vacancies, the trend of reversal is evident, and this data has had a noticeable impact on the market in the past two months.

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