Today’s FOMC meeting is one of the most anticipated and consequential in years. It’s difficult to overstate its importance in terms of economic impact and, perhaps more importantly, Fed credibility.
Yes, we care about whether the Fed hikes 50 or 75 basis points – though either is unlikely to put a dent in inflation. The bigger question is what the Fed does with its $9 trillion balance sheet.
Futures are up modestly.
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Yankee great Yogi Berra famously advised that “when you come to a fork in the road, take it.” The S&P 500 is weighing such a decision this morning, having closed Friday at a critical level of technical support. A rebound from here would buy the Fed a little more time for inflation and hawkishness to ebb. A failure to bounce implies at least another 8-10% downside.
Which will it be? Fortunately for us, our chart patterns are sending a very unambiguous signal.
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Futures came roaring back into the falling white channel yesterday, revealing what many know but few say out loud: the market is broken. When expectations of a 1% quarterly rise in GDP yield, instead, a 1.4% decline, stocks should decline. Plain and simple.
The old “bad news is good news” argument doesn’t work any more because the Fed no longer has the ability (at least this coming meeting) to ease in response to a slowing economy. Perhaps they would have if they hadn’t squandered the opportunity to taper months ago, but that’s water under the bridge.
Instead, we get this massive disconnect which is, at the end of the day, a means of ramping stocks in advance of the bad news we all know is coming via the Fed’s meeting next week: a 50+ bps rate hike. Beyond monetary policy, which is now a headwind instead of a tailwind, we see more and more indications of tough times ahead. As Bill Blain (a treasure) sums it up:
The world is not what we think it should be. It is what it is…and that is getting less pretty.
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The dollar index continues its tear, surpassing both its 2017 and 2020 highs this morning. This is consistent with our forecast [see: Apr 11 Update on Currencies] that the Fed would need help from a rising dollar to attack inflation without having to resort to sky-high interest rates that would further accelerate the growth of the country’s national debt.
At 103.928, DXY hasn’t seen these levels since 2002 in the midst of the 54% dot com crash. 
While beneficial to the inflation outlook, the dollar’s strength hasn’t been very healthy for alternatives such as silver, which just reached our next downside target.
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Yesterday marked the fourth time in the past two months that SPX tested the same important Fib level. The failure to maintain a trend is becoming…well, a trend. 
Will SPX keep playing the same old song or is it finally time for this trend to be broken?
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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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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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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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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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Futures are off sharply overnight on Facebook’s sensational plunge.
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