Absolutely nothing? Well…vol came under pressure again last night despite the recent 10/20 cross and obvious escalation in risk of military action in Ukraine. Apparently the threat of war is good for stocks.
Nevertheless, the futures heard and obeyed and continue to eye the VIX breakdown threat which works more often than not.
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Russian troops entered Eastern Ukraine following its formal recognition of the two separatist regions, marking an escalation in the seriousness of the Ukraine crisis. Futures fell over 94 points from Friday’s close before the algos kicked in and are now down less than 10 as we approach the open.
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After big losses yesterday, ES gained over 20 points overnight. It has since given up those gains and has completed a small H&S pattern targeting 4247.
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Futures continue to lurk around the 200-DMA as we approach Friday’s OPEX, with plenty of bullish and bearish headlines stacking up on either side of this important line in the sand. When it finally lets loose, the move should be pretty dramatic.
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Futures are off about 0.50% as the algos process a big beat (inflation aided) on retail sales and a miss on mortgage applications.
Having retaken the 200-DMA, can ES hold it until OPEX on Friday?
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PPI topped CPI again, coming in at 9.7% YoY (9.1% expected) and a whopping 1% MoM (0.5% expected.)
Futures suddenly aren’t so sure about the overnight ramp to top the 200-DMA.
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In a CNBC interview this morning, Fed President Jim Bullard said “Our credibility is on the line here…” Anyone paying any attention to the Fed knows that that ship sailed a long time ago.
Futures have been all over the map, down as many as 55 points before VIX was hammered following a false news report regarding the situation in Ukraine.
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This is all it took to get FOMC members to walk back Bullard’s hawkish comments. Note the tiny channel breakdown. Terrifying enough to keep QE going and to respond to the worst inflation in 40 years with a mere 25 bps rate hike a month from now? Apparently.
How else can you explain this insanity?
If it’s too hard to see the Fed Funds rate on the above chart, here’s a close up.
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January headline CPI reached 7.5%, a new 40-yr high, sending the 10Y up over 2% for the first time since August 2019 when CPI registered 1.75%. As has been the trend since November, oil/gas no longer leads the way.
Inflation has become widespread, higher than the Fed’s so-called 2% target in every category except, ironically, medical services. Energy was the only category showing a negative MoM change.
Futures are off over 40 points so far. If not for the ramp job of the last few days, ES would be back below its 200-DMA. It’s the markets version of raising prices so you can advertise a huge sale.
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Does it seem like the market always ramps into the monthly CPI data dump? It’s not your imagination. The only exceptions in recent memory were in Sep and Oct, when CPI dipped below trend and then recovered, and in January, when investors’ worries over the Fed’s reaction to the Dec 2021 data caused a mild decline in advance of the release. Even then, SPX managed to rally for several days prior to the Jan 12 release.
We’ve been worried about inflation since Dec 2020 [see: Don’t Ignore Inflation] when it became apparent that the rapid rebound in oil/gas prices would be problematic. Members are quite familiar with the following chart illustrating the very strong historical correlation.
As we pointed out in Dec 2020 [see: Inflation Highest in Nearly 40 Years] the correlation changed as inflation in non-energy categories spiked higher. Many of the stickier categories such as food and rent are beyond the Fed’s control unless impacted by an economic slowdown or the passage of time.
Since CPI is a calculation of YoY price changes, a leveling off of prices for any appreciable time will necessarily reduce their inflation input. The chart above shows the impact on the YoY change in gas prices if they were to freeze at current levels. The Fed relied on this principle whilst assuring us that high inflation would be transitory.
It obviously wasn’t as transitory as they wanted investors to believe, causing interest rates to spike higher at the same time that the Fed was being forced to pull back from supporting the bond market (AKA suppressing interest rates and forcing stocks higher.) Remember when the “reflation trade” was a good thing?
Now the Fed says they’ll raise rates, maybe even a lot. But, it’s hard to imagine them continuing to do so if equities respond as expected. It’s easier to imagine them winding down QE (yes, it’s still happening), perhaps throwing the monetary hawks and Fed critics a rate hike bone or two before giving up on the whole exercise once another equity selloff arrives.
Corrections tend to drive interest rates lower – the Fed’s primary goal. And, if driven by a decline in the YoY delta caused by stalled or falling oil and gas prices, CPI might actually be suppressed rather than exacerbated. Of course, unless we get an actual recession, consumers will likely be stuck with the higher prices we’ve got. But, at least the CPI headlines would be less alarming.
Our equity, bond, FX and commodities targets remain unchanged.
