Market Overview – Morning Express

2 years ago 471 views 6 min read

Bill Baruch

President and Founder

Blue Line Futures

Market Overview – Morning Express

E-mini S&P (March) / NQ (March)

S&P, yesterday’s close: Settled at 3807.50, down 47.50

NQ, yesterday’s close: Settled at 10,772.75, down 142.75

Fundamentals: I have kept the Morning Express light in recent days, simply providing bullet points and trading levels through the holidays. Today, in the final narratively written Morning Express of 2022, I want to introduce the possibility the Fed is done hiking.

In the war against inflation, the Federal Reserve has hiked rates by 425bps this year and is expected to lift them another 75bps before pausing. The committee raised its terminal rate forecast from 4.6% in September to 5.1% at the meeting earlier this month. In November, the bank added verbiage to its policy statement noting it will consider cumulative tightening action, pointing to quantitative tightening. Since the Fed’s balance sheet peaked at nearly $9 trillion in April, it has fallen by about $400 billion as of last week. Higher rates and less liquidity have certainly imposed tighter financial conditions, slowing growth from the housing market to manufacturing and production. They are arguably winning this war; the Cleveland Fed expects headline CPI for December to fall to 6.6% y/y, the lowest in a year. Core CPI is expected to match a 5-month low at 5.9%, the lowest since January. Base comparisons in the coming months will also be higher. Inflation has retreated significantly, but the labor market remains extremely tight, stoking the idea of added Fed measures. Yes, Fed Chair Powell has said time and time again, “the committee will stay at it [hiking] until the job is done.” We expect a soft landing in 2023, but that belief hinges on the Fed being economically-aware, and acknowledging the trajectory of growth if they push the envelope. We don’t believe pausing rate hikes fall under the lauded term “pivot”, but the Fed knows they can neither pause nor pivot until the exact moment they are ready to do so, otherwise, markets discount the maneuver too soon. January will bring another month of economic indicators for the data-dependent Fed. The groundwork for a pause has been laid over the last two meetings, just as the groundwork for tightening more quickly than anticipated was laid one year earlier. Maintaining flexibility will be critical for the bank, and pausing its hikes as early as the February meeting would not box them into a corner, the balance sheet will continue to be reduced, and if needed, the committee could hike again in March. However, the Federal Reserve is at the fulcrum of overtightening, and if that happens, it will be forced to reverse policy measures, igniting fresh inflation tailwinds. If the bank proceeds with caution, as they should, considering such broadly negative market sentiment, we envision tremendous opportunity in the first half of 2023.

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Technicals: U.S. equity benchmarks are working off yesterday’s low, but the damage cannot be ignored as the NQ closed at the lowest level of the year. Price action has responded to major three-star support at 10,746-10,775, helping lead a rebound into the opening bell. Still, the S&P sits below yesterday’s breakdown point and strong key resistance at 3841.25-3845.75. Ultimately, we find the tape vulnerable until the S&P and NQ can clear and close above major three-star resistance at 3871-3875 and 10,971-11,021. Carrying our narrative from above, it would be fitting to see a washout to rare major four-star support in the S&P and NQ, inviting fresh panic selling into the final days of the year before a sharp turn higher, these levels come in at 3764.25-3786 and 10,500-10,595.

Bias: Neutral

Resistance: 3841.25-3845.75**, 3852.50**, 3863.75**, 3871-3875***, 3877**, 3895.50-3900.50**, 3908.50-3912.50***, 3927.75-3931.75***

Pivot: 3821.25-3827.25

Support: 3804.50-3808.50***, 3795.50**, 3764.25-3786****

NQ (March)

Resistance: 10,916-10,921**, 10,971-11,021****, 11,056-11,075**, 11,105**, 11,181-11,208***, 11,254-11,276**, 11,334-11,395***

Pivot: 10,835-10,870

Support: 10,746-10,775***, 10,500-10,595****

Crude Oil (February)

Yesterday’s close: Settled at 78.96, down 0.57

Weekly EIA inventory data is due at 10:00 am CT. Analysts expect -1.52 mb Crude, +0.520 mb Gasoline, and -2.05 mb Distillates. Remember, end-of-year fluctuations in inventories can deviate widely from expectations. In fact, much of the inventory releases this year can be characterized as deviating from expectations due to SPR releases. As always, SPR and Exports flushing into Net Imports, along with Refinery Utilization, will have a great impact.

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Resistance: 78.28-78.39**, 78.96-79.11**, 79.70**, 80.05-80.75***, 81.06-81.18**, 82.75-83.27***

Support: 76.95-77.03***, 75.75-76.23***, 74.03-74.46***