In what were generally viewed as hawkish comments, Janet Yellen reinforced the widely held expectation of a rate hike in December.  USDJPY is rallying strongly in response.

After struggling for the past week at the SMA200 and, more recently, at a TL off its recent highs, it is making a show of breaking out.  Needless to say, equity futures are responding in kind.continued for members…

ES is breaking out of the falling white channel it’s been in for the past week and a half.

While, gold is tumbling towards our downside target.

The irony is that RB, a major contributor to the inflation that so “puzzles” Yellen, is back down to the bundle of moving averages it broke through a few days ago.  If the EIA inventory report agrees with the API’s, it will finally break down today.

VIX, of course, is plumbing new lows. ES bigger picture…remember it already tagged its 1.272 last week — though SPX didn’t.

If the breakout holds, SPX should finally get a shot at its 1.272.  This, of course, would be dirty pool — as SPX closed below oodles of support yesterday.  It was exactly the kind of head fake that makes trading equities a very dicey proposition.The problem with that scenario is that USDJPY and DX are very much overdone.  Everyone was already expecting a rate hike.  This is nothing but a gambit to ratchet up stock prices for the end of the week/month/quarter.

Note that USDJPY is at very significant channel resistance.  If it backs off the channel line and SMA200, RB and CL will not be able to save stocks from a slide.  It’ll be up to VIX — nothing unusual there.  But, a significant enough reversal from USDJPY and VIX won’t be able to contain the damage.The EIA report is coming up at 10:30:  https://www.eia.gov/petroleum/supply/weekly/

Yesterday’s API report showed RB with a 1.47mm build vs the 750K draw expected.  It was the biggest build in 7 weeks.

UPDATE:  10:32 AM

UPDATE:  9:55 AM

A quick update on things…

 

Some thoughts on where things stand…

Before this little bounce, RB had more than retraced the entire breakout that began on Sep 22.  There are only 3 more sessions (including today) to get the month average of gas prices back down to a non-inflationary level.

However, let me play devil’s advocate for a moment.

I’m not a big believer in the rosy macro picture.  I find much of the economic data questionable at best and, sometimes, downright deceptive.  However, the algos are in the driver’s seat.  And, as long as USDJPY or CL can continue to hold their ground and/or VIX can cycle lower, stocks will continue to melt up.

Now, consider Yellen’s position.  She and her colleagues know better than I just how tenuous things really are.  Yet, they also know that they must increase short-term interest rates (NOT long-term rates!) in order to have a cushion with which to work the next time the financial world needs rescuing.

They would be loudly criticized if they increased rates in such an economic environment without any inflationary justification.  Even if you think things are just peachy, it would be easier to justify a rate hike on 2%+ CPI, right?  It might explain why they’re taking their time bringing oil and gas prices back down — not to mention the fact that the October 2016 data will, by themselves, result in a less inflationary YoY comparison for oil…

…though RB remains problematic unless it continues to sell off from its late-August spike.  At current prices, we’ll have a 19% increase YoY.  All things being equal (and, if they don’t game the numbers — I know, not likely) that could result in September CPI up in the 2.2-2.4% range.  It might make more sense to get it down to 2.0-2.2, which is why I think there’s still a chance of a drop to 1.44-1.50 in the next couple of days.But, if they don’t, and we get a 2.2-2.4% print, it solves the credibility problem without stocks taking a hit here at the end of the quarter.  If October averages around 1.44 – 1.52, we’d get a moderating effect as occurred in April – May.  CPI would probably still print at 2%+, but not so high that it alarms people and disrupts the USD.

And, by the way, I don’t think this would even be an issue if it weren’t quarter end and SPX was sitting at a big round, psychologically important number like 2500.

Just thinking out loud…er, on the screen.  I’ll give this more thought.  In the meantime, don’t be shocked if RB  — now down 3% on the day and 8.1% from its Sep 1 highs — continues to slide.

UPDATE:  11:50 AM

For those playing the breakout, we’re just about there.  It gets dicey from here, on as we should get a reversal at the 1.272 at 2510.87.