PPI increased by 2.1% YoY in January, the sharpest increase in 15 months. The monthly increase of 0.5% strongly outpaced expectations of 0.2%. Most of the commentary attributes the beat to transitory trade factors. Yet even core PPI increased at 1.5% YoY.

Futures initially slipped about 1 point on the news, then settled higher, paced by a vitally important breakout in USDJPY. DXY is also threatening new highs as EURUSD tagged our next lowest and most important downside target in years. Yes, this is one of those kitchen sink moments.

I suppose in a logic-based economy a PPI print such as this would diminish expectations of further CB easing. But, that ship sailed a long time ago. The latest numbers I’ve seen call for 60% odds of further rate cuts in July.

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It’s a strange phenomenon: the more serious the coronavirus threat, the more strenuous the efforts to prop up stocks. After headlines such as those below, the market has no business being in positive territory.

Yet, here we are, with ES up 6.50 points.  VIX is actually off.  Sheer lunacy.Likewise, oil and gas are rallying as though the EIA, API and OPEC hadn’t all downgraded their demand estimates.

Will the market take any of this information to heart, or will we get the usual holiday weekend gap higher?

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So…the coronavirus isn’t tapering off after all. Not to worry, though, says WHO adviser Ira Longini. It should only infect about 5 billion people.

If you’re surprised by the degree to which governments and the mainstream media have been downplaying the severity of the outbreak, you haven’t been paying attention for at least the past 10 years.

Having said that, don’t expect that the folks whose job it is to advance the never-ending rally to give up now. Consider how well the market muddled through during the Spanish Flu. And, that was before central banks assumed control of markets. Meanwhile, annual CPI came in right at our expected number of 2.5%, thanks to the YoY oil/gas price boom as we’ve been discussing for the past several months.

For those looking for a big bounce from oil/gas, don’t get too excited just yet. The delta in gas prices for Feb is shaping up as a 5% YoY gain – not as extreme as in Jan but still a factor. For a Fed which is looking for excuses to keep rates low, a big rally in oil/gas right now would be quite inconvenient.

With services inflation up 3.1% YoY, the interesting question is what will happen to goods inflation. Slowing global trade could reduce overall demand, but interrupting supply chains could also be expected to create shortages in certain areas such as electronics. Fortunately, the BLS has models which will smooth these things away.

Futures are none to happy with the spike in coronavirus infections/deaths – with ES off over 30 points overnight……before being buoyed by a timely smackdown of VIX which dared to broach its SMA200.

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The algos are working overtime, this morning, employing the usual VIX breakdown and CL “breakout” to keep futures on the rise. We saw the bullish 10/20 cross in SPX and ES yesterday, so the technical picture has officially shifted. When it comes to this market, where there’s a will…there’s a way.

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SPX broke out to a new high, yesterday, prompted by a last-minute breakdown in VIX that sent algos scurrying.It had all the integrity of a dog-faced pony soldier, but it counted all the same. Now, as the market is about to open this morning, we’re seeing repeated plunges in VIX – just enough to remind carbon-based investors that there’s more where that came from.

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Amidst growing speculation (soon to be evidence?) that the coronavirus outbreak is much worse than the Chinese have admitted, the market is having a hard time whistling past this particular graveyard.

Futures have climbed back from an ugly Sunday, but are hardly out of the woods. If this gently falling, carefully managed channel breaks down, watch out.continued for members… (more…)

The ES trend line we were expecting to break down yesterday did, in fact, break down. But, it has been a very meek, carefully controlled breakdown so far.  Most factors are still bearishly aligned except for DXY, which has broken out of a little falling channel on continued weakness in the euro.

As for the “haves,” it pretty much boils down to SPX, which made a new high on the open, backtesting the channel which recently broke down. Its breakdown should show up on the opening bell.

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Thanks to the many well-wishers for your messages of support over the past few days. My knee surgery went very well Tuesday and I’ve already graduated from the walker to crutches and am determined to replace them with a cane by the end of the day. I’ll probably skip the Boston Marathon this year, but there’s always next year.  The downside of a knee replacement is that it’s somewhat painful. So, please excuse the drug-induced typos that are bound to crop up over the next few days!

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On to the markets. This one is easy.  SPX will make new highs on the open this morning. But the 10-DMA is still below the 20-day, ES’s rising red TL is hanging by a thread…

…and VIX has passed on the opportunity to ramp things even higher – remaining above its SMA200 and the red TL from Aug 5. There are many other warning signs flashing from TNX to AAPL. In other words, caution is warranted. Despite the recent rally, the downside risk is far from over.

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Not the website…but your humble editor-in-chief.  Hope to be up and around by Thursday Feb 6.