“I can’t believe stocks rallied so strongly into options expiration!” said no one.
Between VIX’s plunge, the euro’s ramp, and the yield curve’s decimation, bears have had no chance – even as fundamentals argued otherwise.
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According to futures and talking heads, there’s a 94% chance that the Fed will pause its rate hikes this afternoon – though perhaps with a hawkish tilt. By our reckoning, equities have piled on at least 6% in the past few weeks in anticipation of this outcome.
Is it justified?
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Futures bounced off our 50-day MA target and are up sharply on NVDA‘s blowout earnings/forecast, egged on by Speaker McCarthy’s latest promise that a debt ceiling resolution is on the way.
Of course, this bullishness is unwarranted from a Fed rate hike perspective. Initial claims came in below expectations and Q2 GDP (the deflator was 4.2% vs 4.0 expected) was hotter than expected. Not exactly a scenario that supports a pause/drop.
Unless VIX plunges below 18.58, this ramp job should be faded.
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The OPEX meltup continued overnight, with futures up modestly to new 9-month highs.
Powell speaks at 11am ET and might shed some light on the implications of treasury yields which have pushed to new cycle highs – reflecting a much more cautious assessment of the debt ceiling negotiations.
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Yesterday’s 1.2% spurt higher was driven not only by the usual push in USDJPY and plunge in VIX, but a healthy dose of hopium regarding the debt ceiling crisis. Congressional and White House reps were nearly unanimous in declaring that a deal is as good as done.
Whether they’re speaking the truth or simply trying to avoid a market meltdown a la 2011 remains to be seen. 
Both SPX and ES saw a bullish 10/20 cross, but it could unwind if ES closes back below the former resistance at 4166. Keep on eye on the ever proficuous VIX, which usually triggers algos to buy any significant dips by breaking below support such as the purple channel bottom below.
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The market has frustrated both bulls and bears lately, vacillating between sharp downturns and even sharper recoveries. But, a close examination of the charts shows two very obvious patterns that suggest the tide is about to turn – not in a good way.
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Futures are off modestly after a more hawkish Q&A with Powell than many expected. ES came within a few points of the 50-day yesterday. Based on the overnight action, it should reach our next downside target with ease.
It didn’t help that unit labor costs shot up 6.3% for April versus the 3.3% prior and 3.6% consensus. Perhaps the three rate cuts the market has been pricing in by year end don’t constitute such a great forecast.
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Futures are essentially flat ahead of today’s pivotal FOMC decision and press conference. This follows a day that saw stock prices plunge below our initial backtest target…
…as VIX actually broke out – at least for a few hours. 
The banking crisis obviously hasn’t gone away. How many more First Republics or Silicon Valley banks are out there – clicks away from a bank run? Even those banks which aren’t already in trouble will most certainly cut back on lending, which will certainly raise the odds of a (worse) recession.
Will the FOMC take that into account as they contemplate future actions?
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GDP increased at an annual rate of 1.1% versus expectations of over 2% and Q4’s 2.6%, fueling both recession fears and expectations that the Fed will soon halt rate hikes after next week’s 25 bps increase.
Futures dipped on the news but have since rebounded as the usual VIX smackdown convinced algos to look on the bright side.
For now, algos are ignoring the hotter Q1 PCE data embedded in the GDP print.
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After closing below its 10-day SMA for the first time in a month, ES is backtesting it…
…on the back of PPI data that essentially echoed yesterday’s CPI print. Headline PPI crashed to 2.7% YoY and -0.5% MoM. Though stripping out food and energy, core PPI fell only 0.1% MoM and increased 3.4% YoY.
As we discussed yesterday, 80% of the MoM decline was due to the sharp drop in gasoline prices.
Also out this morning, credit portfolio managers agree with the Fed’s assessment that the economy is headed for recession. It’s a troubling backdrop as we enter earnings season in the midst of a credit crunch.
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