Bottom line, a 50 bps rate hike is back on the table. We got the backtest we expected, and even a little bit more. 
This morning’s ADP employment report further underscores the need to put the brakes on the economy. It will be interesting to see whether Powell’s tone becomes any less hawkish in light of yesterday’s sell off.
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Last week completed the backtests we’d been expecting, with ES, SPX, COMP, DJIA and NKD all holding important technical support.
While the fundamental picture might not justify these prices, the algos are satisfied. And, until price discovery reemerges (if it does), the algos are all that matter.
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Futures have dropped back through the 50-day moving average, putting the 200-day back in focus after yesterday’s near miss.
We’re essentially in the same situation as yesterday except that we’re jumping off from a much lower level.
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Futures are essentially flat this morning after Friday’s OPEX panic to regain the 200-day moving average.
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Futures are up over 0.65% even as VIX has popped 6.25% in the after hours.
What gives?
There’s actually a lot of reshuffling going on this morning, with important implications for currencies and equities.
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They’re all important, but this one carries extra significance due to the potential for a slowdown in rate hikes, or at least the commentary regarding one.
Futures almost backtested the 200-day moving average overnight, but are now essentially flat.
After all the excitement yesterday, our targets remain the same across the board. If anything, the hoopla complicated the Fed’s task by aptly demonstrating the persistent froth in the markets.
I believe this practically guarantees that Powell will pull another Jackson Hole and scold investors for their irrational exuberance. Whether it will be enough to counteract the OPEX effect is anyone’s guess.
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Based on how the market is reacting, inflation is no longer a concern. The Fed will pivot and easy money will be back in no time. Except, as we’ve been discussing, this is one of those weeks which almost always overreacts to the upside: FOMC meeting, OPEX, end of year, etc.
As noted yesterday, the dreaded bearish signals such as a simple 10/20 cross have been averted – at least for now – and the algos are throwing a party.
Yesterday’s gap higher in VIX (in conjunction with a 1.4% rally in stocks) was indeed a massive head fake in light of this morning’s 13% smackdown. Talk about closing a gap…
From where I sit, however, the Fed’s job just got tougher. While monthly CPI came in slightly lighter than expected, we still have problematic wage and rent inflation, and financial conditions are getting looser, not tighter.
Remember Jackson Hole? Maybe it’s VIX’s 13% plunge which is the headfake…
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Unemployment claims came in lower than expected, further dashing the hopes of those praying for a Fed pivot. Meanwhile, the OPEX levitation continues.
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Pretty standard fare for an OPEX week…futures have ramped 1.6% higher on a bounce in USDJPY and CL and a trounce in VIX.
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OPEC+ threw the party they said they would. Everyone was talking about it. But, nobody came.
CL and RB had already celebrated in the days leading up to the meeting and we were left with a non-event with CL stuck at a channel top and RB slamming into its 50-day MA. Might there be an after party?
It matters because the 10Y is in a dicey position – bouncing off its TL, but without a clear engine for more upside.
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