The politicians continue to fib. We’re not sure which politicians are fibbing more than the others, but they’re definitely fibbing. Even Trump admits the US was fired upon by the Iranians (presumably with missiles that weren’t obliterated) – a condition many would consider fire that hasn’t ceased. Oh well, the future are up nicely after a jobs report that confirms what we’ve said for ages: there is no justification for a rate cut.

 

 

According to the CNN article, the Fed is finally getting worried about the effect the Iran war could have on inflation. Better late than never. We got a hint in the last statement, with several dissenters questioning whether there should still be a rate cut bias. Consumers – at least those who eat, drive cars, or buy anything, could have told them it’s already a problem.

It hasn’t risen to the level of worrying the markets, however. Stocks are still on an AI sugar high and the opportunities for a clean backtest are thinning out.

VX is still being quite cagey about breaking down below its SMA200 and channel bottom, leaving open the possibility of a good-sized bounce.

 

VIX, on the other hand, is promoting a damn-the-torpedoes-full-speed-ahead approach to stock prices.

And, don’t look now, but the 10Y has gapped down again.

It could be the drop in oil. But, it could also be the dispersion in markets is starting to worry some equity investors just enough that they’re seeking shelter.

For weeks, Iran has insisted that the US end the war and settle the Strait of Hormuz first, with discussions of the nuclear program to follow. The US has always insisted that it be a package deal, and has tried numerous times to convince and/or threaten Iran to accept that approach. If Trump can be believed, it seems the US is backing down on its demands.

It’s a sensible approach for Trump to take, though it will come at a political cost: more TACO accusations. Apparently, someone in his orbit might have convinced him it’s necessary given the horrid poll numbers we’ve seen for his handling of the economy – the issue which got him elected. But, if you dig beneath the surface of the social media posts, it’s not at all clear that a deal has been reached.  From Al Jazeera…

Earlier on Tuesday, US Secretary of State Marco Rubio declared that Operation Epic Fury, the air and naval campaign launched on February 28, was “concluded”.  What Washington now sought, he said, was a “memorandum of understanding for future negotiations”. For weeks, that is precisely what Iran has been demanding.

In proposals passed on to the US through Pakistan, Iran has in recent weeks sought multistage negotiations, with a preliminary deal aimed at ending the war, and negotiations on the White House’s demands that Tehran end its nuclear programme pushed for later.

Trump and his administration resisted, with the US president insisting that getting Iran to give up its nuclear programme was central to any deal with Tehran.

Now, the US appears to have come around to accepting Iran’s demand, say experts. On Wednesday, the Reuters news agency and the US publication Axios reported that the US and Iran were close to agreeing to a one-page MoU to end the war, even though there have been no detailed negotiations on Tehran’s nuclear programme.

For now, oil prices are down over 5% (versus over 10% a few hours ago), the 10Y is sharply lower, and futures are up over 0.50%.

 

The algos were elated at seeing VX back below its SMA200, though it has since rebounded. A breakdown would require that it remain below 19.21. At the present time, it leaves plenty of doubt.

VIX itself has already broken down several times and is going back to the well today.

Oil and gas futures are holding on to about half of their declines…

 

…so the 10Y is happy.

Could the war actually be over? It’s impossible to say. Trump has shown us over and over that he is able and willing to say or do almost anything to boost stock prices. Al Jazeera reports that Iran is considering Trump’s latest offer. Stay tuned.

 

The US and Iran are still shooting at each other (and others in the region) but so far Trump hasn’t ordered the carpet bombing to resume. And, I don’t think he will. I think the few intelligent people surrounding him who haven’t been fired yet and are willing to speak their minds have explained that he needs an off ramp — and that killing off “a whole civilization” is probably not the best way to go about it. Of course, timing is not on his side.

He needs said off ramp well before the November mid-terms or he’s looking at impeachment #3. The Iranians no doubt realize this, and would do well to drag out the war (nothing mini about it from their standpoint) until November. If Trump were to be neutered, they would have much less to fear from the US.

There are wild cards, of course. China’s last shipments of oil from the Middle East are steaming into port right about now, and they’re going to start hurting. Will they decide to get more “proactive” in reasserting their rights to import oil? Will the US enforce the blockade, thereby preventing China from importing that oil? Could being proactive result in their own blockade of, say, Taiwan and our insatiable appetite for semiconductors? So many questions…

In the meantime, futures are up modestly because it got dark last night, and that’s what they do whenever that happens.

While CL hasn’t made higher highs in a while…

…RB certainly has. And I think gas prices are definitely more important right now.

The bond market seems to agree…

…even though the 2s10s remains unnaturally subdued.

 

ES is off modestly as the technical picture remains stuck in essentially the same position as the past few sessions: two important Fib extensions, a channel midline, and some overdue gap fills.

Futures are slightly higher following yesterday’s spasmodic lurch and have tagged the two Fib extensions: the 1.618 of the 22% 2024-25 correction and 1.272 of the 10% correction earlier this year.

 

VIX continues to motivate the algos…

…while VX has declined to drop below its SMA200.

With the greatest number of dissenters since 1992, the FOMC declined to alter the discount rate. Miran, of course, voted for a rate cut. But, the other 3 dissenters didn’t “support the inclusion of an easing bias in the statement at this time.” The statement that prompted the dissent suggested that additional cuts lie ahead:

In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks.

It’s a tough bias to stomach given that inflation is well north of the Fed’s 2% target and headed in the wrong direction. CPI was 3.26% and PCE just came in at 0.7% monthly and 3.5% YoY.

But, a few of the Mag 7 reported solid earnings, WTI back off yesterday’s sharp rally, DXY is still cratering, and VIX is threatening to break down, so the algos are happy (i.e. futures are higher.)

SPX’s SMA200 is approaching the last falling channel, so we should know in the next day or two whether the overdue backtest and gap fill will be permitted. Given the rumors about Trump resuming bombing in Iran, there’s a pretty good chance. I guess Trump has yet to come to grips with the fact that his tough guy act causes many of his enemies to dig in even harder (e.g. Iran, Powell, Comey, etc.)

No doubt some of his base appreciates the kabuki theater. But, according to polls, even the hard core MAGA is tiring of the war he promised would never happen, the inflation he promised would go away on day one, the war in Ukraine he promised would go away before he even took office, political corruption, etc.

 

 

 

 

Economic data has generally been reported as better than expected, though algos are more focused on the Fed’s interest rate decision later today.

Combined with WTI futures being 4.5% higher, elevated inflation, and Trump cosplaying as Rambo, you might expect there to be some support for a rate increase and VIX to pop up to at least 20. Nothing doing. Futures are down only 8 points…

…and VIX and VX are still threatening to break down below their 200-day moving averages.

Note that the aggressively higher WTI futures…

…are helping to prop up the 10Y.

The FOMC announcement is due at 2pm, with Powell’s last press conference to follow.

Futures are moderately lower as WTI futures bump up against 100/bbl again. Although WTI and Brent are the two most quotes price points, it’s important to recognize that they are futures and represent prices a couple of months out when it is presumed that the Iran War will be over and normal oil operations have resumed. Note the “JUN 26” in the description in the chart below.

This is in stark contrast to the real prices that countries which are running out of oil right now are experiencing. EA reports that physical oil prices right now are substantially higher.

The physical market paints a starkly different picture. Dated Brent has surged well above $140/bbl. Dubai, the key Asian benchmark, spiked to $260/bbl before contract changes reduced the number of deliverable cargoes. West African and North Sea cargo prices are trading at substantial premiums to benchmarks. And once freight costs are factored in, crude is landing in Asia at approximately $170/bbl.

Will physical prices be back below $100 in the near future? Not according to some experts. Paul Sankey of Sankey Research says that the situation is guaranteed to get worse as pre-war oil shipments via tankers from the Persian Gulf have only now reached their destinations. With the Strait of Hormuz closed off for the past six weeks, the lack of new supplies can no longer be ignored.

We can be sure that the next two months is going to be an ongoing, absolute disaster even if you open the straits tomorrow because it’s just locked in by virtue of tankers, and the tankers are all in the wrong places. Over the coming months, this is going to unfortunately deteriorate badly. We’re locked into that.

JPMorgan estimates that OECD inventories will be depleted sometime between May 9-30, “at which point price increases become exponential rather than linear.”

 

 

 

RB is bumping up against its recent highs again.

It’s a big week for economic data, but the market is still marching to the tune of the Iran War — with an assist from the 0bvious suppression of vol. Futures are flat despite having rallied on the prospect of a deal with Iran that has failed to materialize over yet another weekend. Each side blames the other for setting unrealistic conditions.

As politically unpopular as the standstill is for Trump, a resumption of bombing would be even worse. So, he seems resigned to talking tough and letting the Pakistanis ferry talking points back and forth to the equally intractable Iranians.

While ES is hanging around important overhead Fibonacci resistance, SPX is still in no man’s land.

VIX and VX are still loitering above their SMA200s.

And, WTI futures are still near their highs.

It’s unlikely the FOMC will do anything on Wednesday other than bemoan the tough decisions they face.