The algos have been busy overnight again, driving futures up 50+ points as we head into the open. Omicron shutdowns, botched responses and Powell’s admission that the Fed might accelerate the taper seem to have been forgotten.
ES came close to our next downside target, but whiffed. Is the correction over?
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Futures are off sharply on comments by Moderna CEO Stéphane Bancel on the effectiveness of existing vaccines against the omicron variant:
“I think it’s going to be a material drop. I just don’t know how much because we need to wait for the data. But all the scientists I’ve talked to . . . are like, ‘This is not going to be good’.”
Bancel’s comments might also apply to this morning’s testimony from Jay Powell and Janet Yellen who head to Capitol Hill to explain why 6.5 inflation is nothing to be concerned about.
BTW, WTI made it official overnight, tagging our 66.81 target.
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Futures melted up overnight with boosts from VIX and USDJPY.
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With goldbugs calling for gold to double, we got bearish again when it reached our upside target at 1870.60 on November 10 [see: CPI: Out of Control.]
Gold is getting a big boost from the inflation data, and has now reached the purple neckline at 1870.60. I would revert to short with tight stops right here.
We didn’t give silver the hook until Nov 12 [see: Gold – Still a Good Inflation Hedge?] when it tagged our 200-DMA target. Neither metal has fallen much since then. But, the fact that they haven’t broken out in the midst of an inflation scare speaks volumes.
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VIX collapsed in the nick of time yet again, busting ES’ latest falling channel.
Has the run to the year-end barn begun already? (more…)
Stocks tumbled yesterday on inflation numbers that call into question the pace of the Fed’s taper and rate increases. Then they rallied overnight on an 11.4% collapse in VIX. 
The most significant chart on my screens at the moment, though, is the US dollar. DXY has had great difficulty breaking out of a tightly controlled consolidation pattern that dates back to July 2020. It tried this past September, but was smacked down to support stocks’ recovery from that terrifying (sarc) 5.8% slump.
Now, it’s making another bid for a breakout — one we’ve been expecting for months (a very lonely stance BTW) — which wouldn’t bode well for stocks. Is this one for real?
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CPI soared to 6.24% YoY in October, well above the 5.9% expected and the highest since Nov 1990. The MoM print of 0.9% and the Core CPI print of 4.2% also came in hotter than expected and set multiyear records. Put simply, the Fed has lost control.
As we’ve discussed, inflation continues to become more broad-based than the oil/gas-driven effect initially seen earlier this year.
The chart below shows the divergence from May-September and illustrates the importance of oil/gas prices to future inflation prints. If gas prices were to level off at today’s levels, the direct effect on CPI would cease in November. However, even if the base effect were to roll off, the other categories are now equally problematic. 
Futures are off 20 points on the news, with several key factors indicating more to come.
Today marks the point at which the Fed officially stops cheering on the reflation trade.
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Producer Prices for Final Demand in October jumped 0.6% MoM and 8.6% YoY (6.2% less food, energy and trade.)
Futures were little changed… 
…though the 10Y slipped to a cycle low of 1.43%.
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SPX tagged a significant Fibonacci extension Friday, but ES came up short of its equivalent target at 4728. Meanwhile, CL is faltering and USDJPY is rolling over as VIX faces a bullish 10/20 cross. What does it all mean?
Surprisingly, the answer might lie with the bond market.
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The 531K payrolls beat and Pfizer COVID-19 pill could influence the taper schedule. The 4.9% increase in wages should.
Energy and food prices might well fall over the coming months. But, wages are sticky. Whether due to contracts, minimum wage rules, or just market forces, they are very difficult to reduce. While it’s true that workers need higher wages in order to keep up with spiraling cost inflation, this is undoubtedly more fuel for the non-transitory inflationary fires.
Futures are up sharply on the news, which has the factors wondering what to do at ES 4700. Having delivered stocks (with a few trillion in help from the Fed) to all-time highs despite lackluster and occasionally bad news, what should they do with really good news that might speed up the taper?
Stay tuned.
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