PCE comes out later this morning, providing the most up-to-date picture of the challenge facing the Fed. Judging from yesterday’s 2% pop, investors are hopeful that inflation might be leveling off. 
Futures are off very slightly.
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Tag: inflation
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Inflation Update: PCE
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Charts I’m Watching: May 18, 2022
We’re seeing more backtesting this morning, consolidation after yesterday’s strong surge.
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A Swing and a Miss
ES spent 11 hours hanging around our next downside target yesterday. While the session had many characteristics of capitulation, the fact that SPX didn’t quite reach significant support (3956) suggests that the overnight ramp is a head fake.
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Nobody Saw it Coming
The financial press usually starts to take things seriously about this point in a correction. The permabulls aren’t calling bottoms any more, while the bears are licking their chops. It never fails, someone on TV says something like “no one saw this coming.”
It’s silly, of course. What they mean is that they didn’t see it coming. Plenty of others did. Some, like us, saw it months ago. This was our Jan 3, 2022 ES chart, illustrating the downside case.
We reiterated the target, called the bounce over, and nailed down the timeline in late March.
Now, as we finally approach ES 3997, it seems that more and more mainstream bulls and trend followers are getting bearish (better late than never.)
The risk, of course, is that excessively bearish sentiment would stoke another bounce and postpone the 3997 tag. VIX has some thoughts about that.continued for members… (more…)
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A Failure to Communicate
Remember that scene in Cool Hand Luke where Paul Newman mouths off to the Captain after a failed escape attempt? He doesn’t initially appreciate the gravity of his situation. He is soon reminded.
That’s what yesterday’s post-Fed presser felt like. Powell was trying to convey the sense that the Fed means business. It is going to get serious about escaping the inflationary mess it has stepped in.
The market (well, the algos) didn’t hear that. They heard Powell say exactly what they expected and, spurred on by the huge bets lined up on the bearish side of the ledger, decided to mouth off.
Clearly, they don’t appreciate the gravity of the situation, as we were reminded by this morning’s labor productivity report – the worst in 75 years.
We would do well to remember that we’ve had these moments of euphoria before. The carefully curated decline which began in late March…
…has seen more than a few deviations of late.
But, facts are still facts. Inflation – especially very sticky labor costs – is still a problem, and the Fed waited so long that they now have no choice but to tighten into a recession. There was a time when they could have engineered a soft landing. But, that opportunity was, dare we say, transitory.continued for members… (more…)
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FOMC Day: May 4, 2022
Today’s FOMC meeting is one of the most anticipated and consequential in years. It’s difficult to overstate its importance in terms of economic impact and, perhaps more importantly, Fed credibility.
Yes, we care about whether the Fed hikes 50 or 75 basis points – though either is unlikely to put a dent in inflation. The bigger question is what the Fed does with its $9 trillion balance sheet.
Futures are up modestly.
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Update on Currencies: Apr 28, 2022
The dollar index continues its tear, surpassing both its 2017 and 2020 highs this morning. This is consistent with our forecast [see: Apr 11 Update on Currencies] that the Fed would need help from a rising dollar to attack inflation without having to resort to sky-high interest rates that would further accelerate the growth of the country’s national debt.
At 103.928, DXY hasn’t seen these levels since 2002 in the midst of the 54% dot com crash. 
While beneficial to the inflation outlook, the dollar’s strength hasn’t been very healthy for alternatives such as silver, which just reached our next downside target.
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USDJPY: Off to the Races
We published USDJPY’s next highest target months ago with the caveat that it would mean completing a large IH&S that targeted much higher levels and was, thus, far from certain. With inflation already rising sharply, would the BoJ willingly inflict even higher prices on Japanese citizens and businesses just to keep the yen carry trade going?
Wonder no more. In the past month, USDJPY has completed three separate IH&S Patterns. Unlike other central banks which are acting to reduce inflation, the BoJ is guaranteeing even more. It will certainly mitigate stocks’ downside potential to some extent, but at what cost?continued for members… (more…)
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Fed Minutes on Deck
Futures are off sharply as we approach the open. Algos are responding to VIX’s pop back above its 200-DMA and the prospect of increasing Fed hawkishness.
As we pointed out yesterday, the 10Y has again reached the top of a well-formed channel dating back over 30 years. Its ongoing decline has provided much of the fuel for increasing stock, bond and real estate prices, though, reversals at the channel top have marked severe downturns.
If the Fed prevents the 10Y from breaking out while continuing to raise short-term rates, the 2s10s will become even more inverted, validating recession forecasts. And, as we discussed last week [see: Should We Fear a Yield Curve Inversion?] the aftermath of these inversions has never been good for stocks.
Bottom line, the Fed is damned if they do and damned if they don’t. The real question surrounding today’s minutes is whether members will sound as bewildered on paper as they have in person.continued for members… (more…)
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Because
Just because we’re seeing an economic slowdown amidst very high inflation in a Fed tightening cycle against the backdrop of a war that could draw the US into armed conflict…doesn’t mean the market has to react rationally.
Stocks were up sharply yesterday because they’re still driven largely by algorithms. And, yesterday, the algos were focused on the fact that VIX broke down. In fact, if you invested according to VIX’s gyrations, you’d think there’s absolutely nothing to be concerned about in the investing world.
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