This is the most interesting PPI report in some time.  The headline number fell from 3.3% to 2.8%.  But, Core PPI (less food, energy and trade services) ticked higher.  We’re used to seeing food and energy prices as the cause of higher inflation.  Apparently, this time it’s everything else that is ticking higher.

When core price increases become problematic, the solutions aren’t quite as simple as driving down oil/gas prices (which, by the way, bounced pretty dramatically yesterday.)

It should be interesting to watch the 10Y.  Will the triangle continue to hold?

For now, DXY is hanging in there – back above the important trend line established back on June 14.

continued for members…

VIX is in the driver’s seat at the moment.  It reached our downside target with ease and is currently bouncing. But, I suspect it’ll break down if SPX can’t hold at least 2880 – the SMA5 200.

Futures are off only slightly — but, what a mess these channels have turned into.Oil and gas obviously contributed greatly to yesterday’s recovery.  There are a few factors at play here.  First, how big a disruption to energy operations does Hurricane Florence pose?  Second, the EIA came out with a fairly bullish forecast for demand and prices.  Could the administration be trying to drive inflation higher?  Seems unlikely, this close to an election.

Last, API reported a huge 8.4mm crude draw – but an also huge 5.8mm gasoline build.  Both rallied just a little more.

And, what about OPEC’s report out today that throws cold water on those forecasts?

“Rising challenges in some emerging and developing economies are skewing the current global economic growth risk forecast to the downside,” OPEC said in the report.

“Rising trade tensions, and the consequences of further potential monetary tightening by G4 central banks, in combination with rising global debt levels, are additional concerns.”

We’ll get EIA inventory at 10:30 this morning.  But, for now, oil and gas prices continue to push higher. On the currency front, USDJPY’s little rising wedge broke down and the recent TL overhead resistance held.  This is hardly a bullish move.  But, we’ve seen things reverse quickly in the past whenever stocks are threatened.  For now at least, they’re not.EURUSD continues to bump along, offering few hints as to its intentions.  Interestingly, the ECB is lowering its growth outlook blaming the shift on global trade tensions.UPDATE:  10:27 AM

SPX has reached the SMA5 200.  EIA inventory coming out in a few minutes…

UPDATE:  10:31 AM

EIA just came out.  Relative to API, shows a smaller draw in crude, a draw vs build in Cushing, a much smaller build in gasoline, and a much bigger build in distillates.  Bottom line: crude inventory got pushed forward to gas and distillates.

CL is slipping higher despite a more modest draw than reported by API yesterday.  RB is steady.

VIX is still bouncing, which is forcing SPX below its SMA5 200.  The next support lower is the same as last week: the January highs at 2872.87.  Also a repeat of last week: ES will reach its Jan high much sooner than SPX.

UPDATE:  3:30 PM

Couple of odds and ends…

First, SPX has gone basically nowhere so far.  It’s pushing up against the SMA10 for the 5th time in the last two days.  What it needs is for VIX to collapse — which still looks likely but is just shy of a given.

TPTB were hoping for a little more help from AAPL – which underdelivered post the big product rollout event.

It failed to break back above its SMA10 today and is still adrift after its nonsensical breakout in early August.  What the market really cares about is the size of the next buyback expansion.

Thanks to Tommy for the great question regarding the USDJPY and the price of oil.

Hello PW, you explained the reason why CL crashed in 2015/2016 in your earlier posts. (Japanese needed export oil while yen depreciated greatly at that time. They couldn’t take it anymore. So, CL had to come down.)

Now the yen is weakening these days. The Japanese are facing expensive CL imported again. Would the rising CL cause any headache for them? It seems like nobody complains these days. Very strange.

He’s talking about variations of this chart which show that USDJPY broke out and CL broke down on the same day.  Stocks were struggling to hold SPX 1823, and needed USDJPY to break out.  But, in the wake of Fukushima, Japan couldn’t manage further weakening of the yen without a huge decline in the price of oil (priced in USD, a double whammy.)

The charts below illustrate the differences between then and now.  Oil is approaching 8,250 yen per barrel, about where it was in Dec 2014.But, in Dec 2014, Japan’s inflation rate was still above 2% – having been almost 4% earlier in the year as a result of the double whammy of rising oil prices and the depreciating yen.  It’s currently officially below 1%.

Whether the CPI rate is accurate or not is open to debate.  I doubt it’s any more accurate than the US’. But, headlines matter.  So, bondholders are feeling little inflationary pressure, meaning rates can remain subdued –with negative yields all the way out to 6 years.

Back in 2014, the 10Y was way (sarc) up at 0.5% and the 2Y was still (barely) positive.  Today, the 10Y is at 0.11% and the 2Y is at -0.11%.

But, paying any interest on Japan’s mammoth level of debt is intolerable.  The country is broke.  Insolvent.  The only way it’s surviving is by issuing debt to pay the interest on its outstanding debt.  The BoJ needed negative rates in order to survive.

They made it happen.  And, everything is supposedly better, as its government-mandated A+ S&P rating is designed to imply.

As we discussed back in July, however, the bond market is not buying it.  The only reason the 10Y isn’t any higher is because the BoJ keeps pounding it down every time it tries to rally.  See: The BoJ’s Dilemma.

Bottom line (at least nominally): rates are low enough, inflation is low enough and oil prices aren’t yet a problem.  Should this change as a result of USDJPY spurting much higher to save stocks from the next downturn, then we could get a repeat.  But, for now, rising oil prices in yen aren’t officially a problem.

BTW, if you’re curious about just how broke Japan is, read this article which details the shocking number of elderly Japanese women (half of whom live in poverty) who commit crimes, purposely seeking to be sent to prison.

Lest you think it’s just a Japan problem…we’re following in their footsteps.  According to a recent survey by the Economic Policy Institute, the median American family has only $5,000 tucked away for retirement.  Good times…

 

 

 

 

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