March retail sales came in at -1.0% versus -0.4% expected and -0.2% previous. Core slipped 0.3%. Early reaction is that the drop wasn’t enough to forestall another rate hike in May. So far, the futures have taken the news in stride.
But, it remains to be seen whether the algos will view the setup as positively. VIX’s previous bounces off the TL from Jan 2018 have been tough on stocks.
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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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For the first time in over two years, core CPI topped headline. Core, which ignores food and gas prices, climbed 0.4% MoM and 5.6% YoY, while headline came in at 0.1% MoM and 5.0% YoY.
Not surprisingly, futures jumped at the news that headline CPI had dropped. But, our charts still show an important risk just ahead.
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After reaching our next upside target, futures have settled into a pause.
No surprise, as the algo factors are doing the same.
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It was touch and go on Friday as XLE pushed above its 200-day moving average and WTI smacked into its 50-day. Fortunately for oil bulls and inflation enthusiasts, OPEC+ was watching the same charts and took action.
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Futures are up nicely on a twofer: a not so subtle VIX breakdown… 
…and a very unsubtle NKD rescue (back above the SMA200 just in time for Q1) courtesy of the BoJ’s USDJPY meddling.
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Futures are off marginally as the major indices coast into the end of Q1.
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Our yield curve model sounded the alarm on Friday. But, by the end of the day, it had backed off and cooler heads prevailed.
It’s important to recognize, however, that it remains on the bubble, with only a few basis points standing between a rally and another leg down. From a fundamental standpoint, there seems little doubt that the odds of a recession are on the rise.
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Futures have rebounded about 0.5% following yesterday’s roller coaster session that saw SPX backtest its SMA200.
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The situation is pretty clear. By raising rates, the FOMC could continue to fight inflation but would also exacerbate the banking crisis. By pausing, the FOMC could give banks a little relief but would loosen financial conditions – thereby making it tougher to reduce inflation to target.
The seldom discussed situation is what impact the Fed’s decision would have on equity markets. This unspoken third mandate often weighs more heavily on decisions than do full employment and price stability.
From that standpoint, we look for the Fed to either: (a) pause but stress that the pause is due to rapidly tightening financial conditions which are inherently disinflationary; or, (b) raise 25 bps but stress that this could be the last hike for a while because they believe inflation is headed significantly lower due to tightening financial conditions.
Our own research indicates that this is true. Gas prices, which are very highly correlated with CPI, are slated to fall 18.6% YoY in March. The last time the YoY delta hit this level was in Nov 2021 when CPI registered 1.17%.
Obviously, other stickier factors have usurped the inflation narrative: wages, real estate, cars, etc. But, as we’ve discussed often in these pages, many of these other categories have been fairly flat or have declined over the past year – meaning that their YoY deltas are also falling rapidly.
Consider food prices, still elevated at 9.5% YoY in Feb.
Underlying prices, as reflected in the DBA agricultural ETF, have fallen 11.3% over the past year. As long as it remains in the very tight trading range it’s been in since Jun 2022, the YoY decline will reduce inflationary pressures just as oil/gas have.
Futures have been vacillating around unch all night. The real action should start at 2PM with the announcement, followed by Powell’s press conference at 2:30.
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