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Of Debt Ceiling, Recession & FED's runway! - Thomas Ng 12 May 2023

Updated: May 18, 2023

On Fri 12 May 2023 417pm, I emailed Clients my latest post titled 'Of Debt Ceiling, Recession & FED's runway!'.

Below is the full transcript for your perusal:

'Dear Clients . A few weeks back I whatsapp the following message to some of my clients:

. 'Literally 'watching paint dry'- to sum up the current global markets situation The markets (STI, S&P500, Nasdaq, Gold, TLT ETF aka 20yr bonds, Hang Seng & China Tech) are holding up well but they also appears to be not making any major moves either direction in the past weeks. Perhaps all are again awaiting FOMC next wed's decision (likely +25bp & final rate hike). Let me know if you wish to make any portfolio moves or do a cuppa coffee, otherwise Phillip Money Market Fund is still the place to be, for the time being. Thanks!'


This more or less sums up the current global markets situation. Most asset classes aren't making major moves either way. Even last week's 25bp hike with a hint for the potential for a pause in the Jun meeting did not create any sparks to the markets.


So now we are still in the situation where the Technicals are showing bullish bias, but the Fundamental narrative out there is still negative - US's potential hard landing (recession), bank failures and more recently the pending US debt ceiling are the current headline worries.


Debt Ceiling:

Chart 1 - US one-year CDS pricing has went through the roof

No doubt if you follow the US Debt Ceiling space you would have noted that the costs of insuring US debt against non-payment (thru Credit Default Swaps) has gone through the roof, versus the last two episodes in 2011 & 2013. See attached Chart 1 above.

There is indeed some stress there as Congress bickers with Treasury & the current administration just at a time where the business and interest rate environment aren't sweet on the ground. However, in all honesty, I do not think anyone believes that the Debt Ceiling will not be raised. Congress banks again on brinkmanship to push their agenda, so some last minute deal will eventually show up.


Move along, nothing to see here..


Recession or hard landing:

Chart 2A - SPX Daily, 2.5 years. Whipsaw is the name of the game.

With so many negative developments on the horizon, one would have thought that the S&P500 Index (aka SPX) is deep down in the doldrums. Lo & behold, a quick glance on the Chart will show that SPX is currently down only 14% from its Jan 2022 all-time-highs. That actually points more to a garden-variety correction. Simply put, Mr Market has been whipsawing in the SPX 3700 to 4200 region between support and resistance for the past 1 year. See Chart 2A above. . Yes, you heard it right, the SPX has seemingly absorbed a ~500bp rate hikes in a space of 15 mths (one of the fastest hikes in history), an ongoing Ukrainian war, alarm bells of a pending recession and 3 dramatic bank failures, quite well in its stride. . Paradoxically, this 'potential' and 'incoming' recession that we have been warned about for over a year is probably one of the most PREPARED recession of all time. . Think about it, in reaction to this 'upcoming' recession, Tech firms have gone full-force in cutting excesses, and in recent days even the old economy firms are joining in the fats-cutting program. Well, it seems like no one is waiting. So even if the recession does manifest, the eventual cost-cutting efforts then may not be as heavy as feared simply because it is already occurring now. In other words, today's preparation for that big event is likely to point to a softer downturn than we might otherwise get. .

When you anticipate, you are already mitigating it - you can't burst a balloon when the air has been let out periodically in advance!


Commodity prices down, inflation eases, Fed's runway to cut rates:

Chart 3 - US Inflation Metrics

Further, as detailed in my July 2022 memo (, once inflation metrics start to ease off which we are already witnessing this year (see Chart 3 above), the FED would already have laid the runway to allow them to actually cut rates, should the occasion demand them to do it. Will more problematic US regional banks still hiding in the closet be that catalyst for a potential rate cut sometime in Q3 or Q4 this year?

Chart 4 - FED easing probabilities dated 11 May 2023

Check out the attached Fed Plot dated 11 May (see Chart 4 above) - it already shows a 75% probability* of easing for Sep FOMC & 97% for Nov FOMC.


*In case you wish to monitor the Fed Plot at your own pace, pls click here:


Now to see lower lows in SPX, we may again need something of a new 'unknown unknown', or as Nassim Taleb would love to say it, a 'black swan' event. But we can't invest in fear of the unknown, the only appropriate way to do it is to right size your positioning.

Chart 2B - SPX Daily, 2.5 years. 61.8% - 78.6% retracement zone is a natural price magnet

In conclusion, from SPX Chart 2B above, I'm sticking with my original technical view that the 61.8% - 78.6% retracement level remains a strong price magnet for both SPX & Nasdaq in the short to medium term. At the moment, the price action of both indices SPX & Nasdaq 100 (or QQQ ETF) are trending up quite nicely in line with my script.

See Chart 5 below for QQQ ETF (Nasdaq 100 Index). I will further discuss what may happen next when we do get there.

Chart 5 - QQQ ETF (aka Nasdaq 100) Daily, 2 years

61.8% - 78.6% retracement zone is a natural price magnet




In my previous memo dated 5 April 2023 titled 'Show me the Chart and I'll tell you the news, Part 1' (, I mentioned the trio of ETFs I'm stalking or have long, from a macro point of view: TLT ETF, GOLD ETF & Lion OCBC HST ETF.

Today for Part 2, I will discuss the TLT & GOLD ETFs.



Chart 6 - TLT vs TNX inverse relationship. Playbook is straight forward

TLT is the iShares 20 Plus Year Treasury Bond ETF and has a direct and inverse relationship with the US 10-year bond yields. With the Fed Plot mentioned above already showing probabilities for rate cuts at 75% for the Sep FOMC and inflation metrics easing too, will the 10-year bond yields (aka TNX) finally give up its bullish ghost? Due to its inverse relationship, a sustained breakdown in the US 10-year bond yields (below its 6 April low) will likely send TLT ETF into a major rally. . See Chart 6 above - note TLT bullish breakout level will be around the 109 level.



Chart 7 - Gold (XAU/USD) ETF Daily, 10-year

'Gold is the only financial asset that isn’t someone else’s liability'. If you truly understand this statement, then you will appreciate why the recent bank failures are renewing interests into the yellow metal.

Further, as China and other oil and/or commodity-producing nations announced to price some of their commodity contracts in Yuan, such slow but steady de-dollarisation attempts appears to have quickened the money flows into the Precious Metals Complex.

In addition, according to the World Gold Council, China and India as well as the Central Bank of Singapore (MAS) has continued to add gold to its reserves in the past few months, even as Gold price rallied close to all time highs. Perhaps said central banks know something in this Complex that we don't?


From above Chart 7, Gold is showing a mega 3-year rounded bottom or accumulation formation. We will need to see a sustained breakout above USD 2070 to kick off this long-awaited rally. Stay tuned!


Live Long & Trade Well!


Thank you & regards

. Thomas Ng, CMT

Principal Trading Representative 首席股票经纪


Chart source: tradingview / Bloomberg'

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