The Fed failed to control inflation

As resilient as it had been before Wednesday, the S&P 500 encountered selling pressure on Friday, including the top performing tech sector. Bullard’s comments on “inflation surprise” and the first rate hike before the end of 2022 – are they full of hot air, testing the waters before the cut or serious intention? Considering how easily precious metals and then select commodities like copper or soybeans tumbled, rate hikes may seem like a piece of cake now – but in reality, inflexible inflation would prove to be the case. rather persistent than transitory.

The Fed did the bare minimum, admitting inflation in passing, suggesting that it would go away on its own. But it’s more complicated than that – bank credit creation is not strong and had declined before bond yields bottomed in August 2020. Are banks reluctant to lend or customers to borrow? The result of production that does not increase as sharply as expected (reopening of trade) worsens disrupted supply chains and rising commodity prices (cost inflation). Add to that the pressures of the labor market, and you have a recipe for inflation to be more transient than originally thought. In other words, cyclical and structural as also indicated by import-export prices.

The money in the system is not being spent on production or expanding capacity – instead, stocks have been reduced and need to be replenished. As I wrote the previous Monday, this would put upward pressure on prices, as much as Europe woke up or hard-hit countries like India were picking up steam. Thus, new money translates into excess liquidity, trapped in the system, and flowing into bonds, which explains the need for the Fed to act and set the repo rate at 0.05%. . So much for the recent T-bill spike – that “near-deflation” puff is wrong, and yields will rise again – no matter when exactly (or if) other parts of the planned $ 6,000 stimulus package are released. promulgated.

Sure, the Fed’s actions shortened the (sideways) T-bill lull, pushed the dollar higher, but didn’t change the underlying dynamics of the free market that doesn’t want to take over from creation. credit if the Fed is actually shrinking. Chances are they will decline further, but later in 2022 – that was and still is my expectation, with bank credit creation (hopefully) the key variable under their watch as the deciding factor. In the meantime, the inflation problem will become even more entrenched – not soaring inflation or rapid hyperinflation, but a serious problem that will rise more and more in the years to come.

In short, the Fed has played the game of perceptions by points, which is not a serious attempt to nip inflation in the bud. The markets (precious metals, commodities) have been shaken by previous trends, but will see through the bluff that cannot be followed by actions. Inflation swaps (and by extension the modest rise in yields as we drift towards 2.50% over the 10 years preceding the start of this reduction, with positive consequences for financials and cyclicals) have not been wiped out and will regain their rights when the markets test the Fed (and they will). To be clear, I’m calling for still high (not hyper) inflation (PCE deflator readings will be available soon) with the 10-year yield returning to its more usual trading range – so essential to financial repression reducing value. real of all obligations.

Also keep in mind the following macroeconomic point: Inflation is not currently strong enough to bring down the P&L and roll stocks, we are still in reflation and a super bull commodity market. Lower GDP growth potential equates to healthy (tech) growth, but expect stock market leadership to expand once again to include downed industrial and financial sectors.

So there’s no tapping (wait for Jackson Hole), but we’re almost having a temper tantrum, and stocks might need to test the wide 4,050-4,100 support area that’s more likely to go. hold that otherwise. Doing so would confirm that the value is far from going down and that we have yet to run. As threatening as the VIX may seem, the put / call ratio is already positioned on a rather cautious side, meaning that no big correction in the S&P 500 starts here. This is not currently the case – the dislocation of the credit markets (high yield) seems temporary.

Gold and silver are hit by hawkish bets from the Fed, as are inflation expectations. Miners are adhering to it, which means the miners / gold ratio threatens a drop on the weekly chart. Has the real downtrend in metals started? The yellow metal is currently sitting on two strong supports, and the silver / gold ratio still remains in an uptrend. Simply put, the trading action of the past 3 days seems too over the top given the imbalance in the bond market amplifying the dollar’s rally. Sure, it’s a headwind, but the Fed is still as easy as it gets, and the 10yr copper yield ratio remains constructive on the weekly chart, and begins to doubt the veracity of the daily decline. .

Oil is a prime example of the commodities fever that is far from over, and I’m looking for greater (base) strength in black gold despite the dread of the petroleum index. alongside many real assets. It’s consistent with persistent inflation which doesn’t pay off much at all.

Bitcoin and Ethereum also appear to be buying into the Fed’s hawkish narrative, when in reality the money is still loose. But the dollar effect is also at play in cryptos – even though the dollar is constrained in a high time range, its current recovery has not yet fizzled out – markets are not yet close to doubting the Fed. .

S&P 500 and Nasdaq outlook

The daily decline in the S&P 500 still seems to be part of a correction, and no peak pattern. The Nasdaq has held up relatively well and I expect more strength in technology, followed gradually by value.

Credit markets

The intraday reversal of high yield corporate bonds is what matters most, and best followed by the local background formation here.

Technology and value

The technology has been quite resilient, contrasting with the sluggish value or more lagging behind in small caps.

Gold, silver and miners

Gold and miners are reacting as if the tightening is already underway, and real rates are not actually going down. While the link with the dollar was more influential, the action on the price of gold would then decide the fate of the two technical factors mentioned in the legend. Another stronger support line, including 2019 lows, can be found below.

Silver has been and is likely to outperform gold, and looking back the current storm would be of the rea cup type. Although the rebound in copper is not yet there, the 10-year yield report indicates a reprieve.

Bitcoin and Ethereum

Neither Bitcoin nor Ethereum charts are bullish, and the only argument not to start is the presence of two BTC supports.

summary

  • The S&P 500 is approaching a turning point in its still reflationary era. Stabilizing value in the face of rising technology and Treasuries would be the next bull market target.
  • Gold and silver are not out of the woods yet, but tentative signs of stabilization appear to be there. Conquering pre-FOMC levels, attacking $ 1,900 now looks more than a few weeks away.
  • Crude oil remains well positioned to extend its gains, as the commodities sell off Thursday barely touched it. The outlook for oil remains bullish.
  • Bitcoin and Ethereum are not on an immediate winning streak, and Bitcoin’s recent closing lows (below 33,000) remain to be watched for a change in sentiment. The weekly base pattern however cannot be ignored, it is unlikely that a break below 30,000 will succeed sooner we need to move into the 35,000 – 40,000 range. This is a big if.

About Alma Ackerman

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