One of the most interesting charts to float across my desk this morning was this one from FactSet, citing currency factors and cost increases as companies’ top concerns on their Q2 earnings calls.With oil, gas and the dollar up significantly over the past several months, it’s not a huge surprise.

Nor is it a surprise that we’ve seen oil and gas decline sharply — a thesis we lhatched months ago when it became apparent that inflation would rise to problematic levels.

The currency question is a little more complicated.  USDJPY is threatening a major breakout… …and EURUSD a major breakdown… …all against the backdrop of a yield curve which is threatening to invert.What does it all mean, and how might Powell address it in his testimony to Congress?  Can the FOMC find a sweet spot where interest rates, dollar strength, and inflation can all be kept in check?

continued for members…

The key is interest rates.  An update on the 10s2s shows the spread continuing to narrow.

It will continue to be a product of “high” inflation — driven largely by oil and gas prices — which is putting upward pressure on both.  Oil and gas aren’t the only inputs that matter.  But, they’re the easiest to manipulate, as we’ve discussed many times before. Stocks are under pressure from the decline.  But, as the ES chart shows, the SMA10 is closing in on the rising white channel bottom.  In a day or two, we’ll have double support. USDJPY and VIX have been able to control the fallout so far.

I believe VIX should be able to shoulder the load in keeping SPX above 2703.  But, if it looks to be in trouble, I have little doubt that USDJPY will break out instead on continuing to merely threaten.

Where does this leave Powell?  Right where we’ve been discussing.  He has to somehow thread the needle, keeping rates high enough to prevent the dollar from collapsing while getting inflation down closer to 2% — all the while managing to maintain a positive curve and prevent stocks from correcting.

Sounds a lot like rates going sideways and a soon-to-be-announced end to tightening – at least until oil and gas bottom out.  While RB and CL futures are slumping, retail prices have barely budged so far.  So, look for today’s bounce to fail and for CL/RB to continue dropping until prices at the pump have reached 2.67 or so.UPDATE:  3:40 PM

SPX  has managed to hold the FOMC ramp gains of approx 13 points.

RB/CL’s bounces helped. But, the bigger factors were USDJPY (which somehow knew it was time to push higher)……and, VIX — which managed to tag its .886 again – the 5th time in the past week.For those watching NFLX, gotta love the BTFD approach.  If it doesn’t close the gap, things could get ugly tomorrow.