Market Overview – Morning Express
E-mini S&P (March) / NQ (March)
S&P, yesterday’s close: Settled at 4659.50, down 44.50
NQ, yesterday’s close: Settled at 16,081.50, down 250.00
Fundamentals: Time and time again, we have seen inflation muscle policy. For starters, two weeks ago, Fed Chair Powell retired the term “transitory” in describing inflation’s recent ascent. How about the Reserve Bank of Australia? They had attempted yield curve control, only to see their 3-year yield rise one whole percent in October. Once the policy was abandoned, yields pared back. As tomorrow’s Fed meeting quickly approaches, markets battle with expectations of a hawkish pivot, forced by the potential of runaway inflation. Fed Chair Powell has been known to pivot, the Powell Pivot, and he certainly did in front of Congress on November 30th. However, we quickly forget how dovish the committee was a month earlier; they barely tapered and exuded fears of the Q4 2018 autopilot crash. If you have been following us, you know we describe the Fed as having a Jekyll and Hyde approach; they speak in one manner via their meeting communication and another through normal channels to probe the market’s resolve. Heading into tomorrow, the mounting question is whether we are at the onset of a true Powell Pivot, or was this simply a Jekyll and Hyde tactic?
Chair Powell’s Congressional testimony came right at the onset of Omicron and less than a week after Thanksgiving. It is fair to guess the bulk of the speech was written prior to the holiday and therefore before the Omicron news. Rather than buckling to virus uncertainties once again, the time was right to probe. Another wave of the virus will likely distort supply chains further and stoke inflation. However, would such occur at the onset of a rise of infections or after the rise has taken hold in the coming months? On the heels of the new virus strain, Crude Oil collapsed by as much as 25% and is currently 15% from its November peak. This is certainly not inflationary. However, the fall came in the late stages of the month and was likely not much of a factor in last week’s November CPI read that was merely in line with expectations and decelerated from October’s MoM rise. Also, Wage Growth was below expectations and decelerated monthly. In our view, the Federal Reserve missed their window to a speedy tightening this summer. Instead, the committee made it clear they want to be behind the curve. Furthermore, they have explicitly disassociated rate hikes from the taper. At the same time, there are clear signs parts of the labor market are not returning. This, coupled with a more hawkish rotation of voting members in 2022, paves the way for a faster tightening cycle. Taking this all into account, although the Fed is likely to exude a more hawkish tone in the coming months, that time is not now. Not until the rise of infections takes hold and those more hawkish members rotate into voting seats.
Today, the Producer Price Index did surpass hot expectations for the first time in three months at +0.8% MoM and +9.6% YoY. Producer prices are a leading indicator for consumer prices (CPI). Tonight, we look to a deluge of indicators from China, including Industrial Production, at 8:00 pm CT.
Technicals: U.S. benchmarks are taking it on the chin again this morning. Fed jitters and hot PPI data sparked another wave of selling. Price action is now eating into the massive rally from one week ago and Tech is getting hit the hardest. The S&P is testing into major three-star support at 4632.50 and this area will prove critical through the first hour. Can the bulls stage a rally that pares losses back to major three-star resistance aligning with yesterday’s settlement at 4659.50-4661, or will sellers take us down to 4604.50 and work to completely erode last week’s gains? The NQ is also testing into major three-star support at 15,847-15,886. The first hour will be telling. We are likely to get a wave of buying. How high can it reach, and/or how quickly will that wave stall? Overall, we remain Bullish in Bias as this market works through these gyrations, but we will not ignore the fact that a failure to find stability early opens the door to … Click here to get our (FULL) daily reports emailed to you!
Crude Oil (January)
Yesterday’s close: Settled at 71.29, down 0.38
Fundamentals: The IEA’s Monthly Report, along with Fed jitters, have Crude Oil on its back foot to start the day. U.S. PPI was also hotter than expected and stokes those Fed jitters. The IEA reduced its forecast for demand in Q1 by 600,000 bpd, citing new virus cases as weighing on travel. Additionally, the first couple Omicron cases have shown up in China. While these narratives certainly bring a hit to risk-sentiment, there will be a deluge of information over the next trading day. U.S. inventory data comes into focus later today with the private API survey. Early estimates call for -2.6 mb Crude, +1.017 mb Gasoline, and +0.100 mb of Distillates. Tonight, we look to a deluge of economic indicators from China at 8:00 pm CT that include Industrial Production. Let us not forget, although the Federal Reserve is seen as tightening at a faster pace, the PBOC is expected to loosen policy. Tomorrow brings official inventory data at 9:30 am CT, the Fed policy decision at 1:00 pm CT, and the expiration of January options at 1:30 pm CT.
Technicals: Early price action could not chew through first resistance, now a key level aligning with the session high at 72.03-72.29. The weakness has breached first key support at 70.76-70.93 and this will act as a point of balance on the session. Our intermediate to long-term expectations for Crude Oil have not overall changed, but upon further weakness we must see a technical response to our two waves of major three-star … Click here to get our (FULL) daily reports emailed to you!
Gold (February) / Silver (March)
Gold, yesterday’s close: Settled at 1788.3, up 3.5
Silver, yesterday’s close: Settled at 22.328, up 0.133
Fundamentals: Gold and Silver slipped sharply after PPI data came in hotter than expected this morning. Interesting enough, the metals complex has been in a ‘wait and see’ range ahead of tomorrow’s Fed meeting. Much of the landscape is already known and we do not believe today’s PPI data changes that. If the Fed is more hawkish, and the market prices in three rate hikes next year with more certainty, then precious metals are likely to break strong technical support and trade lower. However, if their potential hawkishness is getting overblown ahead of the meeting, how we see it, it paves the way for a relief rally in Gold back to $1800. All things considered, today’s hot PPI read does not favor either of those outcomes. This comes from the standpoint that it could have been hotter and was not. However, the Bond market traded higher immediately after the datapoint, and is retreating; Bond weakness, or U.S. Dollar strength, today would be an outlier that weighs on the tape.
Technicals: Gold’s drop brings a retest into rare major four-star support at 1757-1766, a level in which it has responded to since the Powell’s November 30th pivot. A continued response to this strong level of support will encourage a consolidation that trades back near 1780 ahead of tomorrow’s decision. Silver has fallen below recent lows and major three-star support at 21.80-21.85, this level will act as a point of balance on the session. All things considered, we do not want to underestimate the significance of long-term rare major four-star support at … Click here to get our (FULL) daily reports emailed to you!
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