It’s pretty calm so far this morning, with most of the action percolating through the currency markets as DXY breaks out and the EURUSD breaks down.

There should be more downside ahead, with backtests at SPX 7000 and ES 7184 looking pretty good.

One of my favorite past times as a kid was playing gin rummy with my grandfather. Gramps was a masterful player and could easily beat me with his eyes closed and one arm tied behind his back. When he declared “gin” (usually after repeatedly bemoaning his horrible luck… “woe is me”) and caught me with way too many high value cards in my hand, he would mimic a lumberjack as I laid each on the table, “timber! timber! timber!”

He let me win often enough to keep me coming back for more. I think the countless games we played when observing the stock market. Are the men pulling the levers behind the curtain allowing days like today just to keep permabears coming back for more, or might they really lose control at some point?

As Joshua would remind us, “the only way to [not lose] is not to play the game.” But, that’s no fun. And, how does it even make sense when we all know that markets only go up?  Besides, if stocks were to fall 20% from here, how much joy would you get from declaring “I made 5% this past year” at the cocktail party?

Stocks are falling around the world, with Korea’s Kospi off 10%…

…and ES indicating a more modest 1.5% overnight plunge. As we’ve noted over the past several sessions, there is no shortage of downside targets. The trick is figuring out when Trump will swing into save-the-market via-social-media mode and “fix” things.

As we discussed yesterday, DXY’s strength spells trouble for stocks. Bulls need a reversal.

And, the Iran situation isn’t helping. There aren’t many analysts who buy the narrative that things are going great with the peace deal. It’s quite unlikely that Iran will suddenly decide to make Trump look like the victor.

The algos were busy overnight, turning a 1/2% slump into a slight gain as we approach the open. But, the warning signs are building, starting with our 2s10s model. The latest breakdown is worrisome.

So is the currency picture. DXY has reached triple overhead resistance. A breakout would surprise no one given the US’ inflation problem. It’s decision time for EURUSD too.

The 10Y continues to threaten a breakout, but 4.25% in mid-July would more likely be the result of an equity correction than a sudden decline in inflation.

It’s likely to come down to CL and whether it bounces off its SMA200 or drops through it.

It’s why equity targets are all over the map.

GLTA

Anyone who watched Kevin Warsh’s hawkish comments about taming inflation yesterday is right to be skeptical about the market’s overnight action. It has everything to do with VIX/VX reversing at their SMA200s and oil slipping down to tag its SMA200 and very little to do with the substance of his comments.

Of course, Trump knew what was coming. Why else would he accelerate the signing of his deal with Iran, which even the Republicans are criticizing.  Trump flat out admitted to the rationale behind the artless deal:

“I didn’t want to see economic catastrophe. If you kept this going, that could have ​happened…All I know is ​every time we talked about the possibility of peace, the stock market shot up like a rocket ​ship, Every time we said something negative, like, guess what, we’re not going to be able to settle, it would go down very big.”

The Fed is unconcerned at this time about any economic weakness, but is very concerned about inflation which has remained above target for over five years. Even though gas price-driven CPI likely topped out in May at 4.25%, we’ve seen in the past that other expense categories (flights, groceries, consumer goods, etc.) can ramp up for several months afterwards. So, 4.25% might not be the last we see of Trump’s $200 billion “little excursion.”

And, don’t forget that the war might well not be over. I suspect that if Iran thinks the Party of Trump is doing a little too well as we cruise into the midterms, there will be plenty of complications with the not-so-artful deal.  Although the Fed is feeling hawkish, the 10Y is retreating – maybe some nerves?

The bulls really need DXY to stop here at our 100.80 target.

The breakdown of the 2s10s practically guarantees more downside.

Stay frosty…

It’s the first press conference with new Fed Chairman Kevin Warsh. What probably seemed like a cush job when he was first in the running — lower interest rates substantially by the November mid-terms – has become decidedly more complicated. Inflation is high, but probably coming down…if the 40th end of the Iran really sticks. And, the economy is humming along…at least according to those responsible for publishing government statistics. Clearly you can’t lower rates at this time – stuck real estate industry be damned.

Maybe it’s time to raise rates. There’s absolutely nothing in the real economy that points to restrictive interest rate policy. But, do you raise rates when the impetus for high inflation was man-made, an unforced error?  And, one that could conceivably be reversed easily enough? And, do we even care about the largest divergence in history between those doing just fine and those who are struggling? It’s always led to a rate cut before…

Whatever your expectations of Kevin Warsh, just know that he and his colleagues have few good options. So, they should stand pat and hope (hope as a strategy?) that the market keeps melting up,  The countdown to Trump’s first critical social media post begins.

The SMA200 is a good bounce spot, especially at the bottom of this channel… Hearing that Trump is already walking back how complete the MOU with Iran is…

continuing…

It’s not entirely clear what the terms are, and much is still to be negotiated. But, for now, the algos seem to believe Trump.

CL is off over 5% and is testing the Apr 17 lows.

The bond market and currency markets, however, are little changed.

As we count down the ginormous SpaceX IPO and the annointing of the world’s first trillionaire, it makes sense to remember that the divergence between the haves and the have-nots has never been greater. It’s a disparity made worse by high inflation that hurts the have-nots more than anybody. The inflation is evident in everything from gas prices to cars, electric bills, insurance rates, and hamburgers.

The Fed certainly knows it. The only question is whether they will preside over a worsening of this condition, knowing what it means to the underpinning of the economy, or try to do something about it.

While VX futures are safely below their SMA200…

…VIX itself is not. In fact, it just bounced off its SMA200 and the top of the purple channel from Jan 2022.

Meanwhile, CL is lower on what is probably the 43th end of the war on Iran. Trump has again announced that a deal had been reached and is only subject to the final paperwork being signed. Right. The timing of the announcement had nothing to do with the fact that the market was falling sharply. Really. CL very nearly tagged its .886 retracement, so we should find out soon whether this time is any different.

Meanwhile, bonds are taking it as gospel and are back below the TL from Feb 27.

Stay tuned…

ES bounced about 1/2% overnight after tagging its SMA50 overnight. Then, we got a PPI print that confirmed what we already knew: we have an inflation problem. YoY was a whopping 6.5%. MoM came in at 1.1% versus 0.7% expectations.

Remember, it all started with an unforced error: Trump’s war on Iran, which sent oil and gas prices soaring.

May headline CPI rose 4.2% YoY and 0.5% MoM, in line with our expectations and consensus. The YoY print was the highest since Apr 2023 and well above this past April’s 3.8%.

Futures, which tagged our next downside target yesterday, erased a bit of their overnight losses.

But, it’s the bond market’s reaction we’ll be closely watching today. Note that the 2s10s tagged our downside target from last December. A further drop would almost guarantee more pain for stocks., with ES eyeing 7077.  A steepening would at least postpone the pain.

We could say the same for VIX and VX – both of which broke out yesterday but thought better of it.

SPX backtested the yellow channel top, but like the ES never made it down to its SMA50 – a lapse by the men behind the curtain.

DXY paused prematurely, suggesting that stocks aren’t done correcting.

Tell me what “brilliant” move Trump will make next, and I’ll tell you what to expect from oil. But, for now at least, the bond guys are nervous. And, when they get nervous, stock investors start looking for the exits.

Keep an eye on the 2s10s. ES has formed a H&S pattern that almost exactly targets our next downside target: a backtest of the former high at 7077.50. The chart suggests as soon as tomorrow, but in any case by Jun 15.

We get PPI tomorrow, UMich sentiment on Friday, housing starts next Tuesday and, of course, the FOMC meeting next Wednesday.  This wouldn’t be the first time “the market” threw a fit in order to extort encourage the FOMC into doing the right thing.

Stay tuned…