pebblewriter

Tag: inflation

  • Update on Gold and Silver: Mar 25, 2021

    We have multiple targets being reached this morning, and several more in the works. We’ll start with ES, which just tagged our SMA50 target in a backtest of the falling white channel from which it broke out two weeks ago.

    The one we’ve been waiting on for what feels like forever, though, is silver. SI broke out of the falling white channel twice before it managed to tag our 30.35 target in January. But, as we discussed at the time [see: Hi Ho Silver]:

    With the SMA200 crawling along toward current prices, we can’t discount the potential for a long overdue backtest.

    We’re finally getting that backtest. But, given DXY’s breakout, we have to wonder whether SI’s backtest will hold. We’ll update the prognosis for silver and gold and also sneak in a discussion of EURUSD, which officially reached our next downside target yesterday.

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  • Update on Energy Markets: Feb 16, 2021

    Texas, the energy capital of the US, is running short of energy. The cold snap is breaking records throughout the state, with temperatures so low that many wind and water turbines are frozen and not able to produce energy. Refineries are shut down. As of last night, over 3.5 million Texans are without power.

    Not surprisingly, oil, gasoline and especially natural gas prices have shot higher.

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  • Powell: Let’s Get This Party Started

    Jerome Powell gave a good news/bad news speech to the Economic Club of New York. He noted that employment is still 10 million below February 2020 levels and that a broader range of unemployment would put the current rate at 10%, adding, “We are still very far from a strong labor market whose benefits are broadly shared.”

    As the algos were spinning up their sell orders, he delivered the good news upon which the market relies: “Achieving and sustaining maximum employment will require more than supportive monetary policy.” He added that it could take “many years” to overcome the effects of long-term unemployment and scoffed at the idea of problematic inflation.

    From my vantage point, he’s right and he’s wrong. The strong earnings and cheerleading from pandemic lockdown beneficiaries have drowned out the wails from the pandemic’s have-nots: those who find that even a $1,400 stimulus check won’t pay the rent, the millions of small businesses and self-employed who couldn’t qualify for PPP loans, the millions for whom unemployment  benefits are unobtainable or inadequate.

    But, make no mistake about inflation. Yesterday’s CPI data reiterates our long-held conviction that, although official core inflation is mild, actual inflation is much higher.  Even the understated official CPI will soon soar to levels not seen since before the pandemic (when 10Y yields topped 2%) unless the manufactured rebound in oil and gas prices unwinds posthaste.

    The morning after, futures have regained most of their losses and are again knocking on the door of the 1.272 Fibonacci extension……thanks primarily to yet another VIX “breakdown” from its rising channel which, as we discussed yesterday, has produced another bearish (bullish for stocks) 10/20 SMA cross.Will it be enough to offset the cold water with which Powell just drenched the reinflation trade?

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  • Update on Oil and Gas: Jan 13, 2021

    The last time we were this bearish on oil and gas was on October 3, 2018 [see: VIX Takes the Plunge.]  Our reasoning at the time:

    CL and RB [have] not only reached overhead resistance by our measure, but must deal with inflation that’s too high, bearish API data, another round of Trump tweeting, and a large build in EIA inventory. I think the time has finally come to revert to short…

    WTI and RBOB both tumbled about 40% over the next three months.

    At nearly 3%, inflation had been too high – sending the 10Y to 3.5%. Highly correlated, both had recently broken out of long-term downtrends: CPI above the black dotted line and the 10Y above the blue dotted line.Historically, this might have been perfectly acceptable. But, as we were shouting from the rooftops at the time [see: Why Rising Rates Are a Problem This Time] rising rates with a $1 trillion deficit and debt soaring past $20 trillion was completely unacceptable.

    And, inflation was too high primarily because energy prices were too high. The correlation with the YoY rise in gasoline prices, in particular, has been quite strong over the years.

    No doubt the Fed saw the writing on the wall – as did the White House. Trump had been tweeting about oil prices being too high for months. His tweets had taken on a decidedly desperate tone.

    Yet Saudi Arabia politely ignored him, and oil prices continued higher – until Crown Prince Mohammed bin Salman slipped up in a very big way.

    It took about 5 minutes for virtually everyone to connect Khashoggi’s murder with MBS – who suddenly found himself without friends.  Except for one who, coincidentally, needed a favor.  As we wrote in Coincidences and Consequences at the time:

    It’s interesting how Khashoggi’s murder top-ticked oil and gas prices…and, so soon after Trump’s latest demand that OPEC lower oil prices. As Churchill famously said, “never let a good crisis go to waste.”

    Some were aghast that we would insinuate such a thing.  But, Bob Woodward’s excellent Rage recently shed some light on the topic…But, we digress.  Oil and gas prices crashed 40%.  Inflation and interest rates receded.  The story might have had a happy ending, but the Fed and White House had apparently forgotten about the strong correlation between oil/gas prices and the stock market. When RB plunged 42%, SPX gave up 20%.

    Not coincidentally, they both bottomed on Dec 24 (when Treasury Secretary Mnuchin convened the Plunge Protection Team – but that’s another story.) Trump probably texted to MBS…something to the effect of “jk!!! LOL!!!  ” because oil and gas prices rebounded sharply.

    Wait, you’re probably wondering, what about interest rates?  Bond yields drop for all kinds of reasons. Sometimes it’s because inflation is dropping. Other times, it’s because a stock market crash scares the crap out of equity investors who sell everything that isn’t nailed down and pile into bonds.

    While the PPT’s volatility crush gathered momentum, the Fed announced that the recent round of rate hikes was kaput and began cutting. Stocks were thrilled.

    The occasional mini-crashes in the stock market helped drive rates even lower, until the 10Y finally bottomed out at 1.43% on Sep 3, 2019 – down sharply from its 3.25% October 2018 highs.

    Oil and gas, which had nudged stocks back to their September 2018 highs, could take a breather. Their ascent had been way out of line with the fundamentals, and the charts strongly suggested a reversal.  As we wrote on April 22, 2019 [see: Oil Fails to Rally Stocks]:

    One of the more effective factors in prompting algos to buy stocks is the price of oil. Yet, as we’ve been discussing, higher oil prices are a double-edged sword as they can drive inflation to levels which prompt uncomfortably high interest rates. The oil and gas picture shows RB and CL have both run out of room. It’s time to short again.

    CL, which closed at 75.04 that day, fell 15% over the next six weeks. It bounced around in  in the 60-70 range until January 2020, when it finally broke down.  RB, which closed at 2.13 on Apr 22, fell 32% before stabilizing somewhat. It finally broke down in March 2020.

    The culprit this time, of course, was the coronavirus pandemic. As we noted on February 20 [see: Buckle Up] the stage was set for the algos to keep pushing stocks higher. But, as we had discussed on January 6 [see: Middle East Tensions Escalate] the repeated failure to break out in response to numerous opportunities was itself a strong sell signal.

    CL has tagged its white .886 and, having broken out above the red TL, will threaten the April highs if it breaks 64.77.  If it can’t break the April highs, it will be very susceptible to a downturn. Remember, if the rising white channel breaks down, we could be looking at a major crash. Meanwhile, RB failed to break out past either its SMA200 or the red TL from the April highs. For those not already short, this is the place.

    It certainly was.

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  • Moment of Truth for Bonds

    ZN broke down from its rising red channel back on the 6th. Since then, it has found support in a falling channel – from which it is now threatening to break down.This is a moment of truth for bonds and the many correlated assets such as GC, shown above.  Stocks might not be amused.

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  • CPI: MIA

    Futures remained slightly lower following lower than expected initial claims (709K vs 740K consensus) and CPI – which came in at 1.2% annual and 0.0% for October.  Note that it took a plug number outlier +1.2% pop in electricity to keep CPI from going negative.

    One would think if the economy were really all that healthy, especially with the flood of liquidity still being thrown at it, we’d see at least some inflation.  But, hey, we got the 10/20 crosses we were expecting in ES, SPX and VIX. So, the rally is safe…right?

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  • Retail Sales’ Last Hurrah?

    September retail sales sharply beat estimates, coming in at +1.9% versus 0.8% expected. With enhanced unemployment and virtually all other stimulus having dried up, however, this could be retail’s last hurrah.

    But, it’s enough to boost stock prices on this OPEX Friday 2 1/2 weeks before a presidential election.

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  • CPI: Putting the Brakes On

    CPI rose 0.2% MoM in September, half the August rate. It rose 1.4% YoY, slightly higher than September’s 1.3%. Without the outsized gains in used cars and the minor gains in energy (conflicting with the official EIA data), MoM CPI would likely have been negative.

    This is hardly supportive of the reflation narrative driving equity prices lately. This should be the last straw for the 10Y’s bounce, with the resulting breakdown a significant headwind for stocks.

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  • Inflation Tops Estimates…Again

    Let’s talk about inflation. At 0.4%, both headline and core handily beat consensus of 0.3% and 0.2%. Why?

    This morning’s CPI release is a treasure trove of information regarding price action in the general economy.  On an annual basis, energy tanked and food soared. MoM, food was still strong while energy and used cars soared in value.

    So far, the market isn’t concerned. It should be.

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  • Core PPI Tops Estimates

    Maybe the Fed had it right, leaving the door open to higher inflation. Though August headline PPI came in slightly higher than expected at 0.3% vs 0.2%, core PPI rose 0.4% versus 0.2% expected.

    S&P futures sold off 8 points on the news, but the algos had other ideas. As is often the case, “someone” hammered VIX and it tumbled back below its 200-DMA at 8:39. The algos were only too happy to oblige, breaking ES out of its latest falling channel.

    Honestly, who needs economic data? Why not just have the Fed trading desk announce the day’s high, low and close every morning?

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