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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ES closed back in its falling white channel following its midday recovery, keeping our target price and date unchanged.
Note: The current forecast page has been updated with targets for SPX, ES, COMP, VIX, USDJPY, EURUSD, DXY, GC, SI, BTC, CL, RB and the 10Y.
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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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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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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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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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