I made French toast for my daughter this past weekend.  Most people think I’m a pretty decent cook, especially with weekend staples like French toast, pancakes, etc.

I left her to chow down while I went back to work — only to find this when I returned.  The conversation went something like:

Me: Didn’t you like it?
Her: I don’t like the crust.

It reminds me of the task ahead for newly minted FOMC Chair Jerome Powell.  He must somehow convince investors that the economy is yummy, but that inflation (the crust) isn’t a problem.

In his prepared remarks, he cites the 1.5% core PCE annual rate (as of December) in describing inflation as “low and stable.”  He further makes reference to some of the monthly data:

We continue to view some of the shortfall in inflation last year as likely reflecting transitory influences that we do not expect will repeat; consistent with this view, the monthly readings were a little higher toward the end of the year than in earlier months.

By “a little higher” he is apparently referring to the 0.4% November monthly CPI figure —  carefully avoiding mention of the 0.5% increase registered in January.Hopefully, he will do a good job of explaining how strong economic growth is compatible with low inflation.  The market will not be pleased if he can’t demonstrate more intelligence than Steve Mnuchin did last week, insisting that “you can have wage inflation and not necessarily have inflation concerns in general.”

I suspect Powell is not only much more knowledgeable, but less likely to stick his foot in his mouth.  If his word salad of prepared remarks are any indication, he will walk the same fine line as his predecessor.  Look for his testimony to promise nothing more than the Fed’s continued focus on maximum employment and price stability.

All he really has to do is buy some time, keeping a lid on rates until February’s inflation data is released on Mar 16.  The way things are shaping up, it should be considerably lower, supporting the narrative that inflation was transitory after all, irrespective of actual inflation [see Inflation: The Charade Continues.]

Our analog remains on track. For those who’ve been away, note that I revised the timeline yesterday.  Details may be found in the members’ section at A Break or A Breakdown?  Tomorrow, Feb 28 is our new Day 12.

Powell’s testimony is a potential disruptor.  But, for now, the algos like what they’re hearing.

continued for members…

The revised picture for SPX.  The .707 at  2773.20 is the new important support.  UPDATE:  10:55 AM

TNX is getting a decent bump from Powell’s testimony… …taking the DXY along with……and doing a number on note prices – which are finally getting a shot at our downside target.  Note the drop is way out of proportion to the rise in rates.Even though USDJPY is getting a nice bump……with EURUSD breaking trend…

…stocks are not amused. Oil is testing TL support right here, a drop through could mean a return to the SMA100 at 58.40.And, VIX is backtesting a channel line which represents potential overhead resistance.Gold is getting clobbered, falling below our stops at the channel @ 1326.  My gut tells me that DXY’s bump is overdone, and that gold will bounce back.  But, our analog suggests a Mar 1 turning point.  The SMA100 should be around 1303 by then and would be a better bounce spot. Bottom line, I expect TNX to top out, ZN to bottom out and DXY to drop sharply in the next two weeks.  The drop in rates, in particular, should be supportive of stocks in keeping with our analog.I have a number of conference calls scheduled over the remainder of the day.  I’ll sign off for now, but should be able to recap sometime before the close.

UPDATE:  2:25 PM

Quick update – ES is at important support.  I recolored the gray channel red and removed the small purple ones.DXY is not in any serious trouble yet.  A close above the white midline would potentially be problematic.

It will largely depend on whether or not they can hold the line on TNX — made all the more difficult by Powell’s admission that the US is “not on a sustainable fiscal path.”For now, VIX is holding at the falling white channel .236 line, which it has done several times since Feb 16.Of all the above, VIX is the most important chart.  At this level, VIX is backtesting the midline of the large, falling white channel (the one VIX popped out of as in 2007) and the top (marked with yellow arrows) of the rising purple channel.

UPDATE:  3:10 PM

If the analog holds as expected, shorting VIX here at 18.76 or buying a few May 17 puts at 2.65 will look brilliant in short order.   If it doesn’t, it’s likely headed up to 28ish and the calls will really pay off.Calls on the left, puts on the right.

GLTA.