It comes as no surprise that PPI confirmed yesterday’s hot CPI print, coming in at a whopping 6.2%.

We’ve been beating the inflation drum for so long, it feels a bit anticlimactic to acknowledge that it’s finally here and even slightly greater than we anticipated.

As regular readers well know, I expected central bankers to preemptively head off the problem of higher inflation and higher interest rates by crashing oil/gas prices as they have many times before.

I was surprised to see them pass on this approach and roll the dice with inflation. But, it made more sense once it became apparent that they had essentially taken control of the bond market – the one market that had always “told the truth” about economic conditions. No more.

As strong as yesterday’s equity selloff was, the 10Y barely budged, rising from a high on Tuesday of 1.63% to a high on Wednesday (after CPI was announced) of 1.69%. Today, yields are actually dropping.  An orderly channel like the one below is all you need to confirm that yields are being carefully managed.

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Speaking of carefully managing things…I can only imagine the panic around the Fed, the Treasury and the White House when the Colonial Pipeline fiasco popped up the other day. Higher oil/gas prices had helped get stocks to their recent highs, but it was time for the market’s caretakers to take their feet off the gas lest inflation be even more alarming.

A shutdown of the nation’s largest fuel pipeline certainly wasn’t part of the plan – though I wouldn’t be surprised if the hackers had placed some well-timed bets on oil/gas prices in advance. With markets going crazy over inflation, something had to give.

I had the following conversation on this very topic with a very good friend who happens to be both brilliant and an excellent trader. But, he’s nowhere near as cynical as I am. We chatted just after the close.

Less than ten minutes later…

RBOB futures are off nearly 6% from Friday’s highs.

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With futures having already dipped below the SMA50 to tag a key target earlier this morning, the bounce should continue given the algo action focused on VIX.

continued for members…The bigger picture shows much better targets down below once the bounce has played out – potentially at the purple midline around 4090.

At these levels, ES has backtested a TL connecting the Feb and Mar highs and slightly exceeded the purple channel midline.

We have no way of knowing how big an effort the Fed will mount to protect against lower prices. They have cared about the purple midline quite a lot in the past – with the lows on 12/21/20, 2/1/21, 3/4/21, 3/25/21 all landing at or near it before reversing.

The SPX charts look pretty similar, though with slightly smaller pushes below the channel midline. As with ES, though, the larger dips were all engineered to backtest important Fib levels.

For this reason, I expect the current correction to ultimately reach the 3.618s at ES 3997.93 and SPX 3956.64.

NKD, DJI and COMP all suggest more downside to come. I neglected to chart the upside Fib grid for VIX, but doing so now reveals that VIX pushed to a .618 retracement of its fall from 37.51 in January.Oil and gas (the culprits) are off substantially this morning, with much more to come.

Currencies have settled down, with USDJPY “broken out” but content to sit tight until needed for further support. EURUSD’s “breakout” has proven (so far) to be a headfake, as is DXY’s “breakdown.”

GC and SI continue their feeble “rallies.” As to the bond market, it remains to be seen whether or not the Fed can keep it in check.  At present, the most important chart is the 5-min TNX chart shown above.If it breaks down, then we can assume the rate rise scenario is over for now. But, that doesn’t rule out a sharp drop in rates due to another leg down in equities.

At this point, the Fed should be working to get rates back down if only to prove that higher inflation is no big deal. Remember this chart?

UPDATE: 10:30 AM

With VIX backtesting its SMA200, this would be a good place for the bounce to wrap up.

UPDATE: 3:45 PM

Coming up on the close, with VIX dropping through the SMA200 and back into the falling white channel – down 23% from its overnight highs.

This has sent ES and SPX up to nearly what would have been their necklines had they not busted the right shoulders courtesy of Fed President Bostic the other day.

This rally gives CL and RB as well as USDJPY a chance to drop without doing any real damage to stocks.