pebblewriter

Tag: DXY

  • Currencies: Tick-Tock

    Neither yesterday’s FOMC announcement nor Powell’s press conference produced any meaningful surprises. Yes, the dots shifted slightly, but everyone knows they’ll shift a lot more before long.

    Futures easily reached our initial downside target and came within 5 points (so far) of our second. But, the real action was in currencies, which were finally turned loose. Look for EURUSD to finally reach our backtest target where it faces an enormously consequential decision.continued for members… (more…)

  • The Fed’s Big Day

    We’ve pretty much beat the inflation horse to death on these pages over the past six months. Bottom line, It’s too high and potentially out of control.

    So far, however, the Fed’s been able to hoodwink investors and algos and commandeer the bond market. Aside from making things much more difficult for the little guy – who they claim to care about – there have been few negative repercussions.

    But people are starting to talk. At first it was just fringe strategists like yours truly. Lately, it’s financial pundits, important bankers and hedge fund managers. Has the trance been broken? And, if so, will the market care? Today, we’ll finally find out how clever the Fed can be.

    Two years ago, before any of us had ever heard of COVID-19, our charts already called for some pretty dramatic outcomes.  We were pretty sure the 10Y, having reversed right on target at 3.25% in October 2018, was headed for at least 1.55%…

    …a target that was adjusted to 0.15% — 1.33% on January 13 at which point Wuhan City had reported only 40 suspected cases and one death.  On March 8, it reached 0.398% – well ahead of schedule thanks to COVID-19. Its rebound has been impressive – aided by a sharp rebound in inflation due primarily to the even more impressive recovery in oil prices.

    Ah, oil… We became convinced in March 2018 that oil was headed for a major breakdown, noting important cycles in its peaks and troughs. At the time, our model showed WTI (then at $62) dropping below $20 in early 2023.

    On Jan 3, 2020 we got more specific, pinpointing $17.12 on April 23, 2023.

    Of course, it dropped much lower and much faster than that. And, it’s recovery has been higher and faster than anyone imagined (or the fundamentals would support.)Interest rates and oil prices are irrefragably joined at the hip.  Gasoline prices are especially highly correlated with inflation… …which has traditionally been highly correlated with interest rates.   But, that all changed in the last couple of months when, thanks to the Fed’s ability to control interest rates, the bond market stopped caring about inflation.

    The stock market was elated as short rates flatlined while the 10Y marched higher…

    …leading to the first time in 20 years that a rapidly rising 2s10s didn’t lead to a market crash.The Fed has pulled off a pretty masterful reinflation of the everything bubble. Are they clever enough to avoid the inevitable pop?

    continued for members… (more…)

  • Is the Snoozefest Over?

    You know when the market is in a holding pattern by how VIX behaves. For the most of the past three weeks, we’ve seen sudden collapses in VIX just ahead of the cash open. It doesn’t always last, but it’s very effective in reminding algos to smack the snooze button, “fixing” any overnight declines and sending ES back to within a few points of its all-time highs.

    Almost every day for the past several weeks, investors have turned over and gone back to sleep. But, tomorrow, we’ll get some very important CPI and claims data that could change everything.  Are investors in for a rude awakening?

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  • Bad News is Good Again

    If yesterday’s better than expected ADP jobs data was bad news, then it stands to reason that today’s worse than expected DOL NFP print would be good for the market.  Well, that, and the 13% pounding VIX has taken…

    As it was hammered back below its SMA10, ES was ramped up above its SMA10. Funny how that works.continued for members… (more…)

  • Charts I’m Watching: Jun 2, 2021

    Futures are slightly higher ahead of the open, propped up by the usual pre-opening VIX plunge and WTI ramp job.

    continued for members… (more…)

  • Not So Fast!

    You could argue that the annual PCE print of 3.6%, the hottest since 1992, is merely a function of the base effect – last year’s crash in inflation.But that argument falls flat when you consider that MoM Core PCE, which is completely unaffected by the base effect, soared by a record 0.7%.

    Naturally, both stocks and bonds ignored the data. After all, VIX has plunged 36% in the past 7 sessions, so everything must be okay, right?

    Not so fast.

    continued for members… (more…)

  • What’s the Holdup?

    The Dow, the most easily and commonly manipulated index, has gone nowhere since failing to hold its 3.618 Fib extension at 34,430. It begs the question: what’s the holdup?

    Usually, when a closely followed index goes sideways for a while, it’s because an important moving average is moving into position for a backtest. But, is that the case here?

    continued for members… (more…)

  • Why Bonds Are Still Important

    I had an great question yesterday regarding the bond market: “Is it possible the fear of pandemic in spring 2020 affected the behavior of 2yr and 10 yr and then indirectly triggered the crash?”

    Pebblewriter longhaulers will recall that our bond cycle model forecast a severe plunge in interest rates long before anyone was talking about a pandemic. In August 2019, for example, we were already anticipating a drop to near or below zero around December 2020.It’s what the charts suggested, as we posted in April 2018 [see: Bonds – a Buying Opportunity]…

    …and it’s what was necessary in order to keep America’s books balanced.  Annual debt growth was averaging 5%, and debt:GDP had topped 100% for the past five years.

    As we pointed out in July 2019 [see: Why Interest Rates Must Not Rise] the only way to keep debt service from overwhelming other federal expenses had been to crash interest rates.

    The trick was how to force interest rates lower without alarming us economist types. Past maneuvers had involved adjusting Fed policy (not terribly effective for medium and long-term rates) and forcing inflation lower by forcing oil and gas prices lower as occurred in 2014-2016 and late 2018 (detrimental to stock prices.)

    CPI, which had spent most of 2018 above 2%, had declined to a more manageable 1.7% by September 2019. But, the year-end ramp job in oil prices sent CPI up to a troubling 2.3% by December. The 10Y rose from 1.43% in September to 1.95% in December and, as the chart below shows, threatened to break out.  Something, as they say, had to give.

    As the big brains at the Eccles Building were spitballing potential solutions, the most extreme case of deus ex machina imaginable landed in their laps.  COVID-19 did the Fed a solid – albeit one which went way overboard.

    Oil prices, inflation and the 10Y were suddenly in a race to zero (oil won) and the Fed suddenly faced a slightly bigger problem: how to prevent Armageddon. They needed higher oil prices, interest rates and inflation just to talk equity investors (well, algos) off of window ledges.It worked so spectacularly well that they painted themselves back into a corner very similar to the December 2019 one: rapidly rising inflation and interest rates thanks largely to spiking oil and gas prices – exactly what our models predicted would happen. YoY gas price increases and CPI have been so highly correlated that they are now literally on top of one another.

    For the past few thousand years, this would have been a serious problem.  Everybody knows interest rates spike when inflation spikes. Since the Fed essentially took over the bond market, however, they’ve been able to convince bond investors (well, algos) that spiking inflation isn’t a problem and, even if it is, it’s transitory.

    Want proof? Rates have actually declined since April’s 4.2% CPI print and are nearly back to the same level as before the bomb was dropped.If I walked up to you on a cloudless day and insisted that shaking my rain stick will make it pour, you’d probably double over with laughter. If I had a secret accomplice spray water from a garden hose all over us from an undisclosed location, you might begin to wonder if I was right.

    That’s what’s happening with interest rates right now. Except the rain stick is the Fed’s prognostications and the garden hose is actually a low-flying supertanker carrying 20,000 gallons.

    Of course bond investors care about spiking inflation. But, with the Fed pumping billions of dollars into the bond market every day (more on days with alarming economic data) to force interest rates lower, they can claim that said inflation (“did we mention it’s transitory?”) is obviously not a problem.  And the dopes in the financial press eat it up because, by God, they’re soaking wet.

    Instead of rising, interest rates decline, proving to all (especially the algos) that the Fed must know what they’re talking about or — to us more cynical types — that they’ve completely destroyed the bond market’s price discovery mechanism.

    So, did fear of the pandemic affect bond behavior and, thus, cause the crash? Absolutely – though it’s a bit of a chicken and egg situation. Everything unraveled at about the same time in the mother of all negative feedback loops.

    The irony is that it accomplished what the Fed needed to happen in the bond market — though to excess. The Fed can now use the pandemic as their excuse for the most rapid expansion of monetary supply in history– even as spiraling inflation crushes the disadvantaged whom the Fed claims it’s desperate to help.

    Now, on to the markets.  No surprise, but futures managed to ramp higher again overnight – creating the illusion, at least, that the downside case is off the table. It’s not.

    continuing… (more…)

  • COVID: Still With Us

    Interesting piece in Reuters today on Japan’s vaccination efforts and the overwhelming level of infections in Osaka, Japan’s second largest city, only two months ahead of the Olympics.

    While many countries are making good progress with vaccinations, Japan – the 11th most populous country in the world – is lagging badly.  It’s not the only country in Asia to be struggling.A close-up of vaccination rates shows that many Asian countries are in the same boat.Will the Olympics be the next global superspreader event or, perhaps, the next Tom-Hanks-has-COVID! moment? Those who have put off getting vaccinated might want to consider the number of daily flights from Osaka to the US…

    Meanwhile, futures are paying more attention to the daily pre-opening VIX plunge and a bond market which seemingly no longer cares about inflation.continued for members… (more…)

  • Charts I’m Watching: May 21, 2021

    Yesterday, futures broke out of a very well-formed falling channel for the second time this week. Will it stick this time or is this just typical OPEX nonsense?continued for members… (more…)