PPI dropped just a bit from last month, registering 10.8% YoY (unadjusted) for May versus 10.9% for April and 11.5% for March. The MoM tally was +0.8% for May versus 0.4% for April.
The very slight drop in the YoY data is unlikely to assuage the Fed’s fears about inflation being out of control. But, it’s enough to contribute to a slight bump in futures heading into the two-day FOMC meeting and OPEX.
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USDJPY finally tagged our 132.22 target overnight…
…a target we set over six months ago [see: Update on Currencies Nov 17, 2021]:
Ordinarily, this might be a good thing for stocks. Not this time, as it echos the dollar’s strength against the euro.
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PCE comes out later this morning, providing the most up-to-date picture of the challenge facing the Fed. Judging from yesterday’s 2% pop, investors are hopeful that inflation might be leveling off. 
Futures are off very slightly.
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SPX closed below important support yesterday, suggesting that the current leg down isn’t yet over. Indeed, things could get worse.
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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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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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We published USDJPY’s next highest target months ago with the caveat that it would mean completing a large IH&S that targeted much higher levels and was, thus, far from certain. With inflation already rising sharply, would the BoJ willingly inflict even higher prices on Japanese citizens and businesses just to keep the yen carry trade going? 
Wonder no more. In the past month, USDJPY has completed three separate IH&S Patterns. Unlike other central banks which are acting to reduce inflation, the BoJ is guaranteeing even more. It will certainly mitigate stocks’ downside potential to some extent, but at what cost?
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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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