The China Comeback
Fed to Take a Back Seat?
A Shifting Focus
Until recently the attention was all on inflation and the US Federal Reserve. But there’s a new kid on the block who happens to be named China. Since backing off a staunch zero Covid policy, the economy has been rebounding rapidly.
China Manufacturing PMI just reached the highest level in 11 years by posting the third largest beat on record. Plus, their services and construction sectors have returned to growth.
The PBOC is pumping liquidity into the markets, and according to ZeroHedge:
“Beijing has fully capitulated when it comes to containing the next credit bubble and is now pursuing it wholeheartedly as it hopes to reverse three years of subdued growth by China’s economy during its Zero Covid nightmare.”
China’s massive credit expansion engine is cranking to full steam, and this excess liquidity will make its way through the rest of the world in the form of exported inflation. That’s what happens when you expand credit and increase the M2 supply (cash and highly liquid assets) within an economy.
What does this mean in practical terms? Well it certainly puts a bid under Chinese stocks. Furthermore, Chinese liquidity injections would seem to have a positive correlation with the price of Bitcoin. Ted and others have been pointing this out on Twitter.
Do what you want with this information, but in my personal opinion it’s difficult to see a lot more downside in risk assets with China propping things up. The US Federal Reserve policy is still an outstanding risk, but this narrative is stealing some of the spotlight.
Latest Economic Data
Durable Goods Orders (Jan)
- -4.5% vs – 4% expected and – 5.1% prior
Durable goods orders in the US, which measure the cost of orders received by manufacturers of goods meant to last at least three years, sank 4.5% month-over-month in January of 2023, the most since April of 2020, and reversing from a downwardly revised 5.1% jump in December (Source).
ISM Manufacturing PMI
- 47.7 vs 48 consensus and 47.4 prior
The ISM Manufacturing PMI edged higher to 47.7 in February of 2023 from 47.4 in January, which was the lowest since May 2020, but fell short of expectations of 48.
The reading pointed to a fourth consecutive month of falling factory activity with companies continuing to slow outputs to better match demand for the first half of 2023 and prepare for growth in the second half of the year (Source).
Initial Jobless Claims
- 190K vs 195K consensus and 192k prior
The number of Americans filing for unemployment benefits fell by 2,000 from the previous week to 190,000 on the week ending February 25th, below market expectations of 195,000.
The latest value remained close to the nine-month low of 183,000 hit at the end of January, giving further evidence that the US labor market remains tight in part to reduced labor force participation (Source).
Technical Analysis Corner
Bitcoin Daily Chart
We once again have some FUD in the market. This time it’s beleaguered crypto bank Silvergate, which saw its shares plunge in light of an FTX exposure revelation.
Bitcoin was unable to hold 22.8k and is now caught between the two swing levels with 21480 being the next one to watch in case of further downside.
Applying the volume profile, we see that the next main level below that is around 19170. Reclaim 22.8 and bulls have a chance to run it back toward 24-25k.
Bitcoin 4H Chart
On the 4H, RSI has just dipped into oversold as we test the ascending diagonal. This could absolutely retest the diagonal again or go lower, and in that case the levels to watch are the teal shaded ranges.
A bounce from here would favor a lower high relative to 23677 and price would likely tighten into an equilibrium pattern for some time after that.
S&P500 Daily Chart
The S&P500 large cap equities benchmark bounced heavily from its 200-day moving average on Thursday – even forming a bullish engulfing setup and closing back above the daily 50MA. This is a powerful reversal and bulls need to confirm it with a strong follow-up day to close out the week.
Again, many of the market pundits remain bearish at this confluence of support. Bears haven’t proven anything yet. Lose the 200-day with significant bearish follow-through and we’ll talk.
DXY Daily Chart
Upside risk remains in place here until we get a close below the first red line. In that case it would be entering back into the prior range and risk assets would see relief across the board. Until then the next swing highs at 105.63 and 107.99 are in play. Upcoming Nonfarm Payrolls and CPI prints will help determine the next big direction.
Chart of the Week
YFI has been very steady and showed great strength on this BTC pullback. I expect it to continue grinding up in the coming days. That volume looks awesome. Red lines are targets.
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Editor in Chief, The Trading Tank.
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