Three Fed Chiefs Walk Into a Bar…

…and, the market soars! Just because.

There’s another old economics joke:

Q: How many central bankers does it take to change a light bulb?
A: None. It’s getting brighter, see? It’s definitely getting brighter!

The brain trust which has overseen the Fed since 2006 assembles today at the American Economic Association’s annual meeting. We’ve all seen the data: expansion of the Fed’s balance sheet from $800 billion to $4.4 trillion; a stock market which rallied 340%; 10Y notes which fell from 5.3% to as low as 1.3%; fed funds rate which fell from 5.25% to as low as 0.04%.

Bernake and Yellen obviously oversaw some sizeable market declines – Bernanke’s 57% 2007-2009 freefall obviously dwarfed Yellen’s carefully managed 15% swoon in 2015-2016.

But, it’s Powell’s 20% (so far) 2018-2019 correction that is attracting all the attention, as it is viewed by many as the result of a policy mistake. During his short tenure, Powell has already presided over two breakouts in rates (the solid red trend line, followed by the dashed purple trend line) and, in the past couple of weeks, a breakdown in rates (the dashed red TL.)

The breakouts alarmed many as they had a significant and immediate impact on industries which rely on low rates for prosperity: housing, autos, etc. They also refocused attention on the US’ disastrous debt imbroglio. The increase in rates (the black line) will be enough to help turn a 5% increase in federal debt into a 13% increase in interest expense.The problem is that thanks to the algo-inspiring spike in oil and gas prices last year, inflation was becoming a problem and justified higher rates. Since October, oil and gas prices have tumbled. December CPI will likely come in near 2% or even less. Both extremes were manipulated, as even Trump has now admitted.So, what metric should the Fed pay attention to in deciding the course of future hikes? Slumping real estate sales and ISM surveys? Strengthening employment figures? It seems Powell is damned if he does and damned if he doesn’t.

I suspect we’ll see smiles of relief from Bernanke and Yellen who got out while the getting was good.

Last night we got a pretty typical pre-Fed ramp job. When you see the futures do this……there’s usually a reason, such as the corresponding ramp job in oil. The momentary hiccup when the 312K jobs number was announced was easily offset by hammering VIX from where it was when I began this post two hours ago… …to here.

And, suddenly, everything is getting brighter! If you’re wondering why the ramp job stopped after 37 points, it’s pretty simple. That’s all that was needed to get SPX up to and over its SMA5 200 at which point the algos will have free rein. If Powell’s comments aren’t dovish enough, stocks will have a nice cushion.

I wonder if all those people who were complaining about algorithms deflating the stock market will be upset when they produce a rally?

continued for members…

CL’s chart shows how simple it is to stage a “breakout.”VIX is already following through on its “shot across the bow.”

UPDATE: 10:00 AM

ES has reached potential overhead resistance. We’ll see if SPX can be content with a 50-pt ramp job… VIX suggests there’s more to come. UPDATE: 10:30 AM

Another spot for a potential pause as ES reaches horizontal resistance and SPX its falling white channel midline. VIX is nearing its channel bottom and a larger scale .236 channel line. If SPX intends to plumb our lower targets, this would be a logical point at which to reverse.UPDATE: 12:30 PM

So, Powell said all the right things. The momentum which the algos got going had no trouble with follow through – even though the algo drivers are at or near our targets.

VIX has reached our downside target, but could obviously break lower to the white channel bottom shown above.USDJPY is closing in on the channel top it was originally going to backtest – but, in a little rising wedge.CL and RB, having accomplished their missions, are scampering back to base. This leaves SPX nearing its Feb lows, while ES has already reached its.In short, it’s another decision point for SPX. Any higher, and it’s likely headed for a backtest of the H&S neckline at 2620ish as soon as Tuesday. If inflation comes in super low, as I expect it will, then we could see a very positive market reaction and SPX could be testing 2703 around the 14th.

If it reverses here, it still has a shot at getting back down to 2314 as soon as the 11th or 2280 around the end of the month — with 2138 still as the ultimate goal.

The risks to the upside are pretty clear: the trade war, inflation that puts the Jan rate hike back on the table, low corporate profits, etc.

Re inflation, it should remain subdued unless oil and gas break out and spike higher. At the current regular gas prices of 2.25, the YoY comparisons would be negative for the entire year. Obviously there other components to CPI. But, as the chart up top shows, the correlation is quite high.

This suggests that either CL/RB are going to rebound or that inflation will be problematically low, with interest rates to follow.

UPDATE: 3:55 PM

Keeping the pressure on, all the way into the close.CL and RB hinting at breakouts… And, VIX has slipped down near the red midline, with no particular support here. But, then again, there wasn’t any on Wednesday either.USDJPY has reached the gray channel top. EOD