Futures are keying off the exact same factors as yesterday. USDJPY is creeping higher and VIX is threatening a breakdown.
Traders continue to face an array of headfakes and misdirection as ES backtests its 200-DMA yet again.
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Forget the fundamentals. Between USDJPY’s breakout and VIX’s smackdown (19% over the past two sessions), the bears are getting pummeled by algos.
As a result, ES’ falling white channel has been busted – meaning at least a delay in any additional downside.
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Futures are off sharply as we approach the open. Algos are responding to VIX’s pop back above its 200-DMA and the prospect of increasing Fed hawkishness. 
As we pointed out yesterday, the 10Y has again reached the top of a well-formed channel dating back over 30 years. Its ongoing decline has provided much of the fuel for increasing stock, bond and real estate prices, though, reversals at the channel top have marked severe downturns.
If the Fed prevents the 10Y from breaking out while continuing to raise short-term rates, the 2s10s will become even more inverted, validating recession forecasts. And, as we discussed last week [see: Should We Fear a Yield Curve Inversion?] the aftermath of these inversions has never been good for stocks.
Bottom line, the Fed is damned if they do and damned if they don’t. The real question surrounding today’s minutes is whether members will sound as bewildered on paper as they have in person.
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Just because we’re seeing an economic slowdown amidst very high inflation in a Fed tightening cycle against the backdrop of a war that could draw the US into armed conflict…doesn’t mean the market has to react rationally.
Stocks were up sharply yesterday because they’re still driven largely by algorithms. And, yesterday, the algos were focused on the fact that VIX broke down. In fact, if you invested according to VIX’s gyrations, you’d think there’s absolutely nothing to be concerned about in the investing world.
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Headline PPI reached record highs in February, coming in at 10.0% YoY. Under the hood, prices for unfinished goods registered 14.6%, the highest since January 2001. Prices for processed goods jumped 23.3%. Prices increased across the board, with the largest gains in energy.
Futures were flat going into the early morning VIX plunge, but gained steam once VIX dropped back below its 10-day moving average at 32.28. Look for a backtest of the broken white channel at around 4205.
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USDJPY reached our 118 target overnight.
We charted this target over a year ago [see: USDJPY’s Turn] following USDJPY’s breakout from the falling purple channel [see: The Usual Suspects], reasoning that the Bank of Japan would ramp up the yen carry trade in order to support the Nikkei’s breakout.
The BoJ rarely disappoints, and they didn’t in this case. The question, now, is how far they’re willing to go.
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Absolutely nothing? Well…vol came under pressure again last night despite the recent 10/20 cross and obvious escalation in risk of military action in Ukraine. Apparently the threat of war is good for stocks.
Nevertheless, the futures heard and obeyed and continue to eye the VIX breakdown threat which works more often than not.
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Russian troops entered Eastern Ukraine following its formal recognition of the two separatist regions, marking an escalation in the seriousness of the Ukraine crisis. Futures fell over 94 points from Friday’s close before the algos kicked in and are now down less than 10 as we approach the open.
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In a CNBC interview this morning, Fed President Jim Bullard said “Our credibility is on the line here…” Anyone paying any attention to the Fed knows that that ship sailed a long time ago.
Futures have been all over the map, down as many as 55 points before VIX was hammered following a false news report regarding the situation in Ukraine.
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This is all it took to get FOMC members to walk back Bullard’s hawkish comments. Note the tiny channel breakdown. Terrifying enough to keep QE going and to respond to the worst inflation in 40 years with a mere 25 bps rate hike a month from now? Apparently.
How else can you explain this insanity?
If it’s too hard to see the Fed Funds rate on the above chart, here’s a close up.
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