We’ve been beating the inflation drum for months, wondering when the folks behind the curtain would finally pull the levers to reign in energy prices.  Yesterday was a good start, as gasoline and WTI futures were both off sharply.

Ordinarily, we’d expect to see stocks suffer in tandem.  But, as we discussed yesterday morning:

So far, [VIX] has put the brakes on at a backtest of the recently broken straw-man trend line.  If it can remain below the red TL and the SMA200, and USDJPY keeps ramping, stocks will suffer a mild pullback.

That’s exactly what happened.  Another VIX pullback this morning……coupled with a breakout by USDJPY……has futures in the green by 15 points.But, of course, CPI isn’t out just yet.

continued for members…

SPX and ES are poised to make higher highs today, primarily on the backs of VIX and USDJPY.The dollar is hanging in there, despite the growing evidence that there will not be multiple additional rate hikes. I suspect TNX’s “breakout” will fail.Never can tell with the ECB’s runaway “whatever it takes” stance…but, the pair is holding the channel bottom so far. Selected downside targets for RB……and, CL. UPDATE:  12:30 PM

With CPI (supposedly) at 2.9%, the entire fixed income complex is under renewed scrutiny.  Note that the 10Y notes currently yield 2.856%, and even the 30-year is yielding 2.959.  In other word, there is virtually no difference between inflation rates and interest rates.

As we’ve discussed countless times, rates cannot go up any higher.  Therefore inflation must come down.  The easiest, most effective ways in the past (for central bankers and pols, at least) were to crash oil/gas prices and to raise the value of the dollar.

As far as oil and gas, it’s all about reducing the YoY gap.  Since July 2017 was slightly higher than Jun 2017, they could maintain 2.9% into July without a huge additional drop — hence the SMA200 target on CL and similar drop for gasoline.If they play their cards right, it needn’t be a significant drop versus previous lows.

As far as the dollar goes, the USDJPY breakout should help. The euro dropping in value would also help.  But, it’s tough to accomplish with lower or stable rates.  More on this later. In the meantime, stocks are enjoying USDJPY breakout and VIX’s continued slump. UPDATE:  3:30 PM

Things are pretty much the same as they were a few hours ago.  One important thing to emphasize…USDJPY is at a very critical point. Not only did it break out of the falling white channel, but it is backtesting the huge channel from 2010.  If it goes through 112.60ish, the next resistance isn’t until 120.11.Yes, the .618 Fib that it danced around from Dec 2014 to Jan 2016.  It kept stocks alive for quite a while, and when it finally broke down stocks suffered a significant loss.

If, on the other hand, USDJPY reverses here, stocks will have only VIX and potentially CL/RB to support them.

I’ll write more about this tomorrow.  But, it’s an extremely significant line in the sand for USDJPY.