pebblewriter

Month: February 2021

  • The Bond Market Finally Woke Up

    For months we’ve been warning about the coming inflation problem, wondering when the bond market would notice and/or care.  The immediate problem in a nutshell:

    One of the most highly correlated components of CPI with the headline rate is the price of energy, and gasoline in particular.  If prices were to remain where they are now, the base effect will result in a 40% increase YoY in April.  Historically, this has produced headline CPI in excess of 2.5%.The Fed points out this base effect bump will be transitory and should be ignored, but the recent rise in interest rates tells us that the bond market is not ignoring it. In fact, recent beats in economic data and sharp price increases across the commodity complex underscore the notion that the rise in inflation will not be transitory. The pop we could see in April would be only the beginning.

    As we approach $30 trillion in debt with more stimulus on the way, markets have to wonder what to make of CPI of 2.5-3.0% or higher. In our opinion, the US has no choice but to follow in the BoJ’s and ECB’s footsteps and repudiate higher rates until the end of time.

    10Y note futures reached a level at which we have felt would represent critical support. A drop below this level, we reasoned, would sound loud alarm bells. As we wrote yesterday: “This is quite possibly the Fed’s last chance to avoid a real mess in the bond market.”

    Bottom line, don’t be fooled by the Fed’s ability to repeatedly bail out equities at the last minute.

    The algos have learned well to respond to moves in VIX, currencies and oil/gas when they are so instructed. It’s no surprise that yesterday’s plunge was arrested at our previous SMA downside target.

    The problem is bigger and more difficult to cope with than most – including, apparently, the Fed – can imagine.

    continued for members…

    (more…)

  • Tick Tock

    Fed officials managed to talk stocks higher yesterday, but the underlying question remains: have they already lost control of inflation and interest rates?

    At 3.4%, Durable Orders more than tripled expectations. While GDP, initial claims and prices all came in at or better than forecast. Not surprisingly, interest rates shot higher – reaching key overhead resistance as did WTI.

    This is quite possibly the Fed’s last chance to avoid a real mess in the bond market.

    continued for members… (more…)

  • Bonds: Not Buying It

    It clearly didn’t matter to stocks when 10Y futures broke down last month from the appreciation channel dating back to May 2018. ZN’s decline was gentle, contained.  And, weren’t higher rates a sign that the economy was recovering and inflation picking up as desired? Powell repeats this mantra every chance he gets. Besides, stocks have dutifully continued their “reflation” meltup.

    But, in the back of everyone’s mind: at what point would higher interest rates become a problem?  With the national debt closing in on $30 trillion, higher rates would seem to be an important issue. Future earnings obviously aren’t worth as much when discounted at a higher rate. What would happen if market forces took over and rates shot up, out of control?

    While breakdowns are cause for caution, breakdowns from breakdowns are often cause for alarm. That’s where we are today. And, yes, it could be a big problem.

    continued for members… (more…)

  • Charts I’m Watching: Feb 23, 2021

    Despite numerous head fakes, ES’ H&S Pattern has completed and provides a road map to some important tests of our downside targets.continued for members… (more…)

  • Charts I’m Watching: Feb 22, 2021

    Better late than never…  ES tagged our 3862.25 a little after midnight last night and is enjoying a slight bounce……courtesy of VIX’s pullback from its SMA100. Remember, VIX’s IH&S targets north of the SMA200.

    continued for members (more…)

  • All Better

    Futures are up nicely after yesterday’s VIX-inspired stick save  Recall that ES had completed a bearish H&S Pattern and VIX had completed a bearish Inverted H&S Pattern at the opening bell. Futures were off over 30 points and heading lower.

    If VIX’s IH&S had held, ES’s pattern targeted 3832 – a drop of 3.2% from recent all-time highs. But, as bears know all too well, even a minor drop in equities has been verboten lately.

    Instead, VIX’s neckline failed and ES’s pattern never played out. It rebounded at the nearest convenient trendline and repeated a very tiresome pattern of ramping overnight. Such is the power of algos.

    continued for members… (more…)

  • Inflation: A Growing Chorus

    After feeling like the lone inflation alarmist for the past few months, I find myself in the midst of a growing chorus which now recognizes the Fed’s conundrum. Building inflationary pressures are now obvious to all.

    What isn’t clear is whether the Fed’s nonchalance re rising rates is real or feigned. And, if feigned, at what point will they throw in the towel on the sales pitch that rising rates are great?

    Futures are back below yesterday’s lows and small H&S patterns have formed on both ES and VIX.

    continued for members… (more…)

  • Retail Sales and PPI: A Blowout

    Retail sales soared by 5.3% (vs 1.2% est.) in January. Stripping out auto sales, it was even higher at 5.9% (vs 1.0%.) The control number, which strips out food, auto sales, building material stores and gas stations, was up a whopping 6.0%.

    Note that gas receipts’ 4% MoM increase was all price change: EIA data shows a 6.3% increase from December which, at current prices, will top 7% for February.

    The PPI data was no less spectacular. January headline PPI rose 1.3% (vs. 0.4% est) and core (w/o food and energy) came in at 1.2% (vs 0.2%.)

    Futures, which were up modestly overnight, have tumbled to a TL of support at a 19-pt loss, with the SMA10 just below at 3899.42 which would provide better support. Should it not hold, we’re still looking for a backtest of the previous high at 3862.Consider that this spike in PPI has taken place with a relatively modest increase in oil and gas prices. As we’ve discussed for months now, the YoY increase will soar to over 30% in the next two months unless oil and gas prices collapse – something that is hard to fathom in the midst of the weather-related power shortages currently afflicting Texas.

    With FOMC minutes coming out later today, it will be very interesting to see how they spin this data.

    continued for members…
     (more…)

  • Update on Energy Markets: Feb 16, 2021

    Texas, the energy capital of the US, is running short of energy. The cold snap is breaking records throughout the state, with temperatures so low that many wind and water turbines are frozen and not able to produce energy. Refineries are shut down. As of last night, over 3.5 million Texans are without power.

    Not surprisingly, oil, gasoline and especially natural gas prices have shot higher.

    continued for members… (more…)

  • 500 Miles High

    Thinking of the late great Chick Corea this morning as I survey the sky-high equities market…  Futures have regained about half their overnight losses, spurred by a timely dip in VIX and pop in 10Y yields (testing Monday’s highs.)

    continued for members… (more…)