PPI Echoes CPI

After closing below its 10-day SMA for the first time in a month, ES is backtesting it……on the back of PPI data that essentially echoed yesterday’s CPI print. Headline PPI crashed to 2.7% YoY and -0.5% MoM. Though stripping out food and energy, core PPI fell only 0.1% MoM and increased 3.4% YoY.

As we discussed yesterday, 80% of the MoM decline was due to the sharp drop in gasoline prices.

Also out this morning, credit portfolio managers agree with the Fed’s assessment that the economy is headed for recession. It’s a troubling backdrop as we enter earnings season in the midst of a credit crunch.

continued for members…

Yesterday’s SPX close was a bit of a headfake, coming just above the SMA10. FWIW, the Dow has rallied right back into it white channel top.As we’ve discussed, the algos can certainly engineer new highs by continuing to manipulate VIX. A drop through the TL from Jan 2018 would easily do it.

There just isn’t that much room to go before reaching that TL. And, I believe TPTB would rather save that maneuver for a rainy day – an economic malady that would otherwise tank the market – rather than a BS push to new highs that clearly is out of keeping with the economic and earnings backdrop.As such, I see nothing but downside here. The trick, as always, is knowing how far and how fast – something I’ll be working on the next few days, assuming the SMA10 backtest holds.

A glance at VIX’s 15-min chart tells us it’s entirely possible the market will drift sideways for a while, much the way NKD has.But, I don’t expect that. I think between earnings and credit conditions and worsening economic data, we’ll see a crack in equities. I’m more inclined to continue believing in our XLU model, which suggests another 20% downside from here by mid-June.

Currencies are trying to hold back an equity selloff at the moment, with EURUSD pushing to new highs on the PPI print.

Mathematically, this means new lows for DXY – which is usually good for US stocks… As we’ve discussed, CL and RB seem to be about done – suggesting that the 10Y will continue to fall.

Again, this is generally good for stocks as long as the 2Y doesn’t outpace it – a good possibility if inflation is considered tamed and sentiment shifts to the risk of an economic slowdown.How long can the 2Y hang in there as inflation cools?