The Fed has traditionally used higher interest rates to put a lid on inflation which, unless oil and gas promptly reverse their moonshot, will soon reach 2.5-3%. Yet the unflappable Mr. Powell insists that the Fed isn’t concerned and has no intention of raising rates any time soon.

So, what does it mean that the very concerned market is doing it for him, even as he speaks? Does that not count?

The morning-after talking heads have reminded us that rates were much higher than 1.5% in past years.  True, it was over 5% in 2007. But national debt was only $9 trillion. Might it matter that debt has more than tripled since then?

The concern, of course, isn’t the notion of paying slightly higher interest rates on $2-300 billion in issuance over a transitory period of higher inflation. The concern is that inflationary pressures in addition to spiking oil/gas prices are building and that the Fed might have painted themselves into a corner.

Is Mr. Powell simply unflappable or are he and his colleagues possibly blind to the mounting risks?

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ES tagged our next downside target yesterday. It was two days ahead of schedule, but it counts all the same. Now the bounce, aided of course by VIX’s ubiquitous 18% smash-and-grab and 200-DMA backtest. continued for members… (more…)

I know I’ve been beating this drum for many months [for instance: HERE, HERE and HERE], but push has finally come to shove. Here, in the simplest terms possible, is the dilemma facing oil and gas prices.

Given that interest rates are close to zero and must remain near zero out of necessity…

…and the dramatic increase in oil and gas prices since last April’s crash would result in at least a 40%+ YoY increase……and CPI is very positively correlated with YoY increases in gas prices…

…and interest rates are very positively correlated with CPI……will politicians and central bankers allow oil/gas prices to remain at these levels?

ES reached our next downside target a few hours ago. This is important support. The size of ES’ bounce and VIX’s reaction upon reaching its 200-DMA (26.09 – don’t worry, it will) should determine next steps.

Assuming that Powell will not be able to satisfy the market’s concerns in his interview later today (tools to deal with inflation? what tools? how, without raising interest rates?) we’ll look for a bounce there and a drop to the red .786 where it intersects with the rising white TL at 3721.25 – ideally on Monday.I’ll be working on the recent Update on Currencies for the remainder of the day but will check back in if anything unexpected happens.

I recommend this Bloomberg article for anyone trying to get a handle on what’s going on in the bond market. I continue to believe the inflation/interest rate dynamic will be the most important variable going forward.  If you’d like to know what time it is rather than how the watch works, check out the recent Oil/Gas Update.

GLTA.

UPDATE: 2:00 PM

ES just reached our next downside target two days ahead of schedule. This is interesting support.continued for members… (more…)

Sorry, Mr. Powell. No can do. There is no way to prop up stocks if interest rates continue to rise as rapidly as they have. And, there is no way to prevent interest rates from rising rapidly unless you are willing to put a lid on inflation.

And, there is no way to put a lid on inflation (at least in the short run) unless you’re willing to crash oil/gas prices over the next six weeks. And, sorry, but we all know what that would do to stock prices. Just the thought of it has done plenty.

The guys behind the curtain have prevented a breakdown so far, but the short-term indicators have slowly turned negative over the past couple of weeks. What’s it going to be, Mr. Powell? Pick your poison.

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Last week, VIX shot up above its 200-DMA and experienced a bullish 10/20-DMA cross (bearish for stocks.) It even backtested its 200-DMA on Friday – leaving bears a rare bit of encouragement for the coming week.

Naturally, VIX was slammed back below its 200-DMA and is showing a 12% decline on absolutely no news (JNJ’s vaccine approval was already a done deal) as we approach the open. The algos are delighted.

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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.

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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…)

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…)