pebblewriter

Tag: FOMC

  • 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…)

  • Live by the Algo…

    Live by the algo, die by the algo…so the saying goes.  ES continues to make good progress toward our downside targets, with the usual assistance from currencies and commodities AWOL so far.

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  • PPI Confirms Hot Inflation

    It comes as no surprise that PPI confirmed yesterday’s hot CPI print, coming in at a whopping 6.2%.

    We’ve been beating the inflation drum for so long, it feels a bit anticlimactic to acknowledge that it’s finally here and even slightly greater than we anticipated.

    As regular readers well know, I expected central bankers to preemptively head off the problem of higher inflation and higher interest rates by crashing oil/gas prices as they have many times before.

    I was surprised to see them pass on this approach and roll the dice with inflation. But, it made more sense once it became apparent that they had essentially taken control of the bond market – the one market that had always “told the truth” about economic conditions. No more.

    As strong as yesterday’s equity selloff was, the 10Y barely budged, rising from a high on Tuesday of 1.63% to a high on Wednesday (after CPI was announced) of 1.69%. Today, yields are actually dropping.  An orderly channel like the one below is all you need to confirm that yields are being carefully managed.

     *   *   *

    Speaking of carefully managing things…I can only imagine the panic around the Fed, the Treasury and the White House when the Colonial Pipeline fiasco popped up the other day. Higher oil/gas prices had helped get stocks to their recent highs, but it was time for the market’s caretakers to take their feet off the gas lest inflation be even more alarming.

    A shutdown of the nation’s largest fuel pipeline certainly wasn’t part of the plan – though I wouldn’t be surprised if the hackers had placed some well-timed bets on oil/gas prices in advance. With markets going crazy over inflation, something had to give.

    I had the following conversation on this very topic with a very good friend who happens to be both brilliant and an excellent trader. But, he’s nowhere near as cynical as I am. We chatted just after the close.

    Less than ten minutes later…

    RBOB futures are off nearly 6% from Friday’s highs.

     *   *   *

    With futures having already dipped below the SMA50 to tag a key target earlier this morning, the bounce should continue given the algo action focused on VIX.

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  • Blowout Inflation is Here

    April CPI came in at 4.2%, a rate not seen since August 2008.

    CPI has topped 4.2% only twelve months in the past 30 years, with the bulk of those instances during Jan-Sep 2008 when CPI pushed above 10Y yields.

    The Fed has managed (so far) to keep a lid on yields, providing additional evidence that the bond market remains broken and is no longer a valid source of price discovery.The details indicate the actual number should be higher, even by the BLS’ deceptive standards.  Gasoline, for instance, is listed as having experienced a 49.6% YoY increase…

    …though the actual increase was 62%. Rent has risen 10%, well above the shelter increase of 2.1% cited by the BLS.

    The rise in both CPI and gas prices continued the high positive correlation seen over the past several years.

    The effect on equities has also been muted so far. As with bonds, it has nothing to do with markets “shrugging off” data.

    The bond market’s supposed reaction to the most significant economic data of the past 15 months.

    Cue the Fed doves, who will continue to insist that rapidly rising prices are a good thing. Wouldn’t it be nice if, just once, the MSM would ask them to explain how spiking food, gas, rent and used car prices will benefit the average American – you know, the ones they claim to care so much about?

    By now, it should be obvious that the billlions being thrown at markets is intended to prop up stocks and keep interest rates from breaking out. Remember…when the 10Y broke above and then failed to hold the red TL in Sep 2018, SPX promptly began a 20% correction.

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  • Biggest Jobs Disappointment in Over 20 Years

    Blockbuster jobs data? Not so much. At 266K versus over 1MM consensus, it was the worst miss since 1998.

    The futures initially held the overnight ramp, taking their cues from VIX, which barely budged on the hugely disappointing print. But, VIX also hasn’t (yet) broken down the way it normally would if a full-court press were on to preserve the rally – the kind we saw yesterday when Atlanta Fed President Bostic served up new all-time highs on Dow by insisting that tapering mustn’t even be discussed (lest Death Eaters be summoned!?)

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  • Charts I’m Watching: May 6, 2021

    Futures are flat after tumbling to and holding our backtest target yesterday morning. But, pay no attention to stocks just yet. They should continue to be under pressure, with the real action in oil and gas.

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  • Yellen Goofs, Tells the Truth

    Two quotes by Janet Yellen, only hours apart.  The first clearly emphasizes the very real risk of rapidly rising inflation…

    “It may be that interest rates will have to rise somewhat to make sure that our economy doesn’t overheat, even though the additional spending is relatively small relative to the size of the economy.”

    …while the other clearly walks back the earlier assertion.

    “I don’t think there’s going to be an inflationary problem. But if there is, the Fed will be counted on to address them.”

    The reason for the second comment, of course, was the market’s reaction to the first – a tantrum, if you will.

    Most of us remember when, in 2013, Bernanke spooked the markets with talk of a rollback in bond purchases. Yellen did the same thing a few years later as Fed chair. This one is slightly different, as it highlights the facts which, by now, should be clear to everyone: inflation is a very real danger to the economy and the markets.

    Yellen’s retraction won’t change that.

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  • Still Not Transitory

    At some point – perhaps after six months of hot inflation data – the Fed will be forced to admit that inflation pressure are not transitory. This morning we saw evidence that March personal incomes spiked by 21.1%, the most since 1946. Personal spending for the month shot up 4.2%, the most since last June. And, PCE’s 2.3% is the biggest since 2018.

    S&P futures are calling BS on the whole modest/transitory inflation story – off over 20 points so far.

    And, VIX’s bullish (bearish for stocks) 10/20 cross hasn’t gone away.

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  • Not Transitory, Not Even Close

    If gasoline prices remain where they are or continue to rise, Powell will be just plain wrong about inflation being transitory. This is what to expect if gas prices were to flatline at this level through December. Unless most of the other components of inflation were to nosedive, CPI will remain well above 2% for the remainder of the year.

    Persistent enough for you, Mr. Powell?

    But it doesn’t matter. At least not yet. Although the (flawed) CPI data is more relevant to almost everybody, the Fed focuses on PCE, which mutes the reported inflation even more than CPI.  March PCE is due out tomorrow, and should continue not to alarm anyone.

    In addition, the blowout 3%+ April CPI won’t be reported until May 12. The Fed might roll the dice and leave prices where they are, hoping that they can control the fallout from truly alarming numbers.

    Or, we could see some preventative price action in the futures starting as soon as Sunday. The third option, of course, is the good old “miscalculation” of oil/gas prices, resulting in a CPI print that’s not so scary. They’ve done it plenty of times before.

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  • The Fed’s Clever Misdirection

    If you were playing a drinking game this morning keying off the word “transitory” you’d have passed out by now.

    Seemingly everyone is talking about inflation these days. They all want to know whether inflation will be transitory (as Jerome Powell repeatedly insists) or persistent. When it comes to markets, this is the wrong question. I’ll explain.

    The federal government threw ordinary Americans under the bus 40 years ago when it began altering the process by which inflation is measured and reported [for more, read John Williams’ excellent primer HERE.]  Cost of living increases (and interest rates) have been tied to this muted CPI data, meaning that consumers have had trouble keeping up with actual increases in rent, food, gas, medical care, etc. which have run about 10% lately. It’s a key reason the middle class has been steadily shrinking.

    If the Fed/government were determined to keep actual inflation at or near 2%, they would simply limit the increases in oil/gas prices which are largely to blame for runaway inflation as they’ve done quite successfully in the past.

    Since CPI data collection and reporting has become so convoluted, though, the MoM and YoY increases in oil/gas prices have been the primary drivers behind the reflation narrative which is responsible for this past year’s margin expansion/recovery. In other words, the Fed has needed these sharp rises in energy prices to avoid disappointingly low inflation.The other issue, of course, is that stock market performance is joined at the hip with oil and gas prices. Crash them, as was done in late 2018 or early 2020, and you’re likely staring down the barrel of a equities correction.

    Let them spike higher, though, and you run the risk of soaring inflation and interest rates. At least that’s the way it used to work.

    Over the past 10 years, however, there have been many disconnects. Importantly, they have much less to do with the ebbs and flows of economic activity than they do with managing (usually suppressing) interest rates.

    Regular readers know that the Fed now faces an important test. Thanks to last year’s crash, April’s YoY increase in gasoline prices should be around 60% and that (after averaging 1.2% since the May 2020 lows) CPI could top 3-3.5%. What might this do to interest rates?

    CPI has climbed nearly back to its 2018 highs. But, despite quadrupling over the past year at a rate of increase which has never been seen in our lifetimes……10Y yields (1.6%) are still less than half their 2018 highs (3.25%.) How could this be? Hint: it’s not because the increase in inflation is transitory.

    Here’s another little hint.

    Bottom line, whether or not inflation is transitory doesn’t matter nearly as much as whether or not the Fed can convince bond investors algos to ignore the sharp rise in inflation that will be reported in two weeks.

      *  *  *

    The 10Y has been vitally important to markets and the Fed. So, it wasn’t about to leave things to chance, for instance, when it nearly broke out of a very long-term channel in October 2018. As we expected, oil/gas prices not so mysteriously crashed in the nick of time – causing interest rates to also crater.continued for members…
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