If yesterday’s better than expected ADP jobs data was bad news, then it stands to reason that today’s worse than expected DOL NFP print would be good for the market. 
Well, that, and the 13% pounding VIX has taken…
As it was hammered back below its SMA10, ES was ramped up above its SMA10. Funny how that works.
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The Dow, the most easily and commonly manipulated index, has gone nowhere since failing to hold its 3.618 Fib extension at 34,430. It begs the question: what’s the holdup?
Usually, when a closely followed index goes sideways for a while, it’s because an important moving average is moving into position for a backtest. But, is that the case here?
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Live by the algo, die by the algo…so the saying goes. ES continues to make good progress toward our downside targets, with the usual assistance from currencies and commodities AWOL so far.
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It comes as no surprise that PPI confirmed yesterday’s hot CPI print, coming in at a whopping 6.2%.
We’ve been beating the inflation drum for so long, it feels a bit anticlimactic to acknowledge that it’s finally here and even slightly greater than we anticipated.
As regular readers well know, I expected central bankers to preemptively head off the problem of higher inflation and higher interest rates by crashing oil/gas prices as they have many times before.
I was surprised to see them pass on this approach and roll the dice with inflation. But, it made more sense once it became apparent that they had essentially taken control of the bond market – the one market that had always “told the truth” about economic conditions. No more.
As strong as yesterday’s equity selloff was, the 10Y barely budged, rising from a high on Tuesday of 1.63% to a high on Wednesday (after CPI was announced) of 1.69%. Today, yields are actually dropping. An orderly channel like the one below is all you need to confirm that yields are being carefully managed.
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Speaking of carefully managing things…I can only imagine the panic around the Fed, the Treasury and the White House when the Colonial Pipeline fiasco popped up the other day. Higher oil/gas prices had helped get stocks to their recent highs, but it was time for the market’s caretakers to take their feet off the gas lest inflation be even more alarming.
A shutdown of the nation’s largest fuel pipeline certainly wasn’t part of the plan – though I wouldn’t be surprised if the hackers had placed some well-timed bets on oil/gas prices in advance. With markets going crazy over inflation, something had to give.
I had the following conversation on this very topic with a very good friend who happens to be both brilliant and an excellent trader. But, he’s nowhere near as cynical as I am. We chatted just after the close.
Less than ten minutes later…
RBOB futures are off nearly 6% from Friday’s highs.
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With futures having already dipped below the SMA50 to tag a key target earlier this morning, the bounce should continue given the algo action focused on VIX.
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April CPI came in at 4.2%, a rate not seen since August 2008.
CPI has topped 4.2% only twelve months in the past 30 years, with the bulk of those instances during Jan-Sep 2008 when CPI pushed above 10Y yields.
The Fed has managed (so far) to keep a lid on yields, providing additional evidence that the bond market remains broken and is no longer a valid source of price discovery.
The details indicate the actual number should be higher, even by the BLS’ deceptive standards. Gasoline, for instance, is listed as having experienced a 49.6% YoY increase…
…though the actual increase was 62%. Rent has risen 10%, well above the shelter increase of 2.1% cited by the BLS.
The rise in both CPI and gas prices continued the high positive correlation seen over the past several years.
The effect on equities has also been muted so far. As with bonds, it has nothing to do with markets “shrugging off” data.
The bond market’s supposed reaction to the most significant economic data of the past 15 months.
Cue the Fed doves, who will continue to insist that rapidly rising prices are a good thing. Wouldn’t it be nice if, just once, the MSM would ask them to explain how spiking food, gas, rent and used car prices will benefit the average American – you know, the ones they claim to care so much about?
By now, it should be obvious that the billlions being thrown at markets is intended to prop up stocks and keep interest rates from breaking out. Remember…when the 10Y broke above and then failed to hold the red TL in Sep 2018, SPX promptly began a 20% correction.
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Blockbuster jobs data? Not so much. At 266K versus over 1MM consensus, it was the worst miss since 1998.
The futures initially held the overnight ramp, taking their cues from VIX, which barely budged on the hugely disappointing print.
But, VIX also hasn’t (yet) broken down the way it normally would if a full-court press were on to preserve the rally – the kind we saw yesterday when Atlanta Fed President Bostic served up new all-time highs on Dow by insisting that tapering mustn’t even be discussed (lest Death Eaters be summoned!?)
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Futures are flat after tumbling to and holding our backtest target yesterday morning. But, pay no attention to stocks just yet. They should continue to be under pressure, with the real action in oil and gas.
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Two quotes by Janet Yellen, only hours apart. The first clearly emphasizes the very real risk of rapidly rising inflation…
“It may be that interest rates will have to rise somewhat to make sure that our economy doesn’t overheat, even though the additional spending is relatively small relative to the size of the economy.”
…while the other clearly walks back the earlier assertion.
“I don’t think there’s going to be an inflationary problem. But if there is, the Fed will be counted on to address them.”
The reason for the second comment, of course, was the market’s reaction to the first – a tantrum, if you will.
Most of us remember when, in 2013, Bernanke spooked the markets with talk of a rollback in bond purchases. Yellen did the same thing a few years later as Fed chair. This one is slightly different, as it highlights the facts which, by now, should be clear to everyone: inflation is a very real danger to the economy and the markets.
Yellen’s retraction won’t change that.
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Despite a few tense moments midday, ES held the TL of support from last Wednesday and has rebounded to within 7.50 points of the important Fibonacci extension and channel top at 4153.62.
Will the substantial overhead resistance at these levels matter this time? We’ll know very, very soon.
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Futures are off slightly on a low volume Monday following what should have been a bigger reaction to the latest PPI data that was off the charts.
Either bond traders all took Friday off, or it would appear that the Fed has taken “supporting” the markets to new heights.
Markets will have another chance to react this morning…unless, of course, VIX futures fail to react to the obvious support.
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