Will the Fed Turn this Market into a Pumpkin?

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

S&P, yesterday’s close: Settled at 4623.50, up 17.75

NQ, yesterday’s close: Settled at 15,691.25, up 67.00

Fundamentals: It is Fed Day and equity markets are at record levels. Will the Fed turn this high-riding carriage into a pumpkin at 1:00 pm CT? All year, Chair Powell and committee have been as patient as it gets. Remember, they want to be behind the curve. Have they fallen too far behind? Inflation is certainly on their mind. Is it still transitory? Recent data, CPI and PCE, show its rise to be contained. This has set a bullish undertone across risk-assets because theoretically it supports the Fed’s patience. However, these are not forward indicators, they are lagging. If you have followed our comments for a few months, you know we expected inflation via the headline data to stay contained from July through September. This was in part due to higher base comparisons last year and this spring. Despite these contained reads, over the same timeline, odds of a rate hike have steadily increased. They now signal a 56% probability the Fed hikes rates by June. The economy hasn’t necessarily improved. In fact, GDP in Q3 slipped to 2.0% from 6.7% in Q2, below an expected 2.7%. Why are the odds of a rate hike increasing as the economy is slowing? The answer, inflation is muscling policy. Energy costs are soaring. Although Core inflation data excludes energy, thousands upon thousands of items are made from petroleum; everything from a sneaker to toothpaste. The problem is two-fold coming out of the pandemic with distorted supply chains also driving up costs. Going on two decades, central bankers have printed money, but have done it in the face of disinflation. In that environment, policy makers were hitting softballs. In this environment, policy makers are facing the Atlanta Braves relief staff. They are literally behind the curve. The Federal Reserve is likely to remain patient and simply announce they will begin tapering bond purchases by $15 billion a month. At the end of the day, Chair Powell fears a Q4 2018 “auto-pilot” moment that crashed the market through Christmas. Many, many people now rely on a higher stock market as supplemental income. If this rise is derailed, turned into a pumpkin, consumer spending would take a hit. However, growth is already eroding due to inflation. Chair Powell will soon have to decide between elevated asset prices and containing the rise of everyday costs.

At the Fed’s June meeting, they raised their inflation expectations, and this was a band-aid over a worsening problem. Today, we will be on the lookout for the committee in their policy statement, or from Chair Powell in his press conference to dial back the transitory remarks. The more the committee acknowledges inflation, the more they can get ahead of it.

ADP Payrolls came in at 571k, above an expected 400k. The closely watched ISM Non-Manufacturing read is due at 9:00 am CT, along with Factory Orders. This comes after final IHS Services PMI at 8:45 am CT.

Technicals: The S&P continues its battle at the massive 4620 level, and our rare major four-star resistance now includes yesterday’s high print. This was not only because of the range expansion, but because trend line resistance is also rising. At the same time, the NQ has extended gains to the next round number, and we have major three-star resistance aligning at 16,000-16,028. Price action remains extremely firm ahead of today’s Federal Reserve policy announcement. We will look to our rising momentum indicators, aligning as our Pivots at … Sign up for a Free Trial at Blue Line Futures to have our entire fundamental and technical outlook, actionable bias, and proprietary levels for the markets you trade emailed each morning.

Crude Oil (December)

Yesterday’s close: Settled at 83.91, down 0.14

Fundamentals: Crude Oil is on its backfoot after API data last night showed a larger than expected headline build. The private survey printed +3.594 mb of Crude, -0.552 mb Gasoline, and +0.573 mb Distillates. This compares to expectations on today’s official EIA report for +2.225 mb Crude, -1.33 mb Gasoline, and -1.443 mb Distillates. Storage at Cushing has underpinned prices in recent weeks in the wake of less supportive headline data. Over the last three weeks inventories at this closely watched hub have fallen by 8.2 mb. Cushing, Oklahoma is known to have distortions, but being central to the pipeline network those distortions typically carry a lot of weight. Traders must keep a close eye on Cushing inventories as they near the lowest levels since August 2018 and sit at a mere 41% of the April 2020 highs.

Traders want to keep an eye on the broader macro environment heading into today’s Federal Reserve policy meeting. Also, let us not forget, OPEC+ does hold a meeting tomorrow.

Technicals: Price action is testing major three-star support for arguably the seventh time since the mid-October rally through $80. This is a floor at 80.77-81.17 and a close below here will encourage a healthy consolidation lower. Today will certainly be more fundamental, but the technicals will have the utmost importance in defining the ranges. Our momentum indicator is slipping and aligns with previous support at … Sign up for a Free Trial at Blue Line Futures to have our entire fundamental and technical outlook, actionable bias, and proprietary levels for the markets you trade emailed each morning.

Gold (December) / Silver (December)

Gold, yesterday’s close: Settled at 1789.4, down 6.4

Silver, yesterday’s close: Settled at 23.507, down 0.566

Fundamentals: Gold and Silver will have their time, and that time is not now. We have been Neutral in Bias, although pointing to short opportunities here, in our videos, and on our trade desk. In our S&P/NQ section, which focuses on today’s Federal Reserve meeting, we describe a Fed that has fallen too far behind the curve. The idea that they will have to catch up, at some point, if not today, has been a significant headwind for Gold and Silver. At the end of the day, it has forced precious metals to diverge from inflation many expected them to hedge. This divergence is not new, and we have pointed to it for a year now. Gold and Silver will have their time once the Federal Reserve acknowledges inflation and speeds up tightening that ultimately slows the economy.

ADP Payrolls came in at 571k, above an expected 400k, and this has weighed on Gold. The closely watched ISM Non-Manufacturing read is due at 9:00 am CT, along with Factory Orders. This comes after final IHS Services PMI at 8:45 am CT.

Technicals: Silver closed below the support levels, most significantly 23.87-23.96. Continued action below 23.58 paves the way to $23. As for Gold, it held construction above major three-star support through yesterday, but this has since given way. Continued action below 1781.9-1784 paves a path of least resistance to major three-star support at 1760, but ultimately sets a date with rare major four-star support at … Sign up for a Free Trial at Blue Line Futures to have our entire fundamental and technical outlook, actionable bias, and proprietary levels for the markets you trade emailed each morning.

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Originally Posted on November 3, 2021 – Will the Fed Turn this Market into a Pumpkin?