Fed Chair Do-Over

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

S&P, yesterday’s close: Settled at 4123.50, down 24.50

NQ, yesterday’s close: Settled at 12,515.50, down 108.50

Fundamentals: Financial markets, after Friday’s blowout jobs report, have repriced the odds of the Federal Reserve’s terminal rate. Rate markets now favor hikes to 500-525bps and then for the Fed to hold. Essentially, the Fed tried communicating this last Wednesday, but it got lost in Chair Powell’s overconfident use of the word “disinflation”. In fact, there is now a higher probability at 30% versus 15% that the Fed will hike as high as 525-550bps through the summer rather than 475-500bps. However, those odds shift in the back half of the year and signal a 35.7% chance the Fed brings rates back below 5% before yearend. Regardless of Powell’s demeanor last week, the committee has been cohesive and adamant they have no plans on cutting this year.  

At the end of last year, we at Blue Line Futures certainly feared a deteriorating economy, though we expected a resilient consumer in January. We have since learned the economy grew at a better pace than expected in Q4, consumer spending remained buoyant, and though wages were softening, they continued to expand at a historic pace. However, manufacturing was eroding, and there were early signs that the services sector was beginning to slip. Albeit services, ex-housing is the stickiest inflation component. As last week unfolded, JOLTs Job Openings hit a five-month high, with 762,000 more openings than expected, while Initial Jobless Claims again hit the lowest since April 2022, which was at the onset of the Fed’s first hike. The brightest spots were all exuded throughout Friday’s report and followed by an ISM Non-Manufacturing beat (services). Because of the market’s reaction function, our rhetoric was always that the Fed cannot signal a pause until the exact moment they are ready. Looking back to January, we have become more confident in the economy. Although this was one Nonfarm Payrolls report, the Fed cannot consider a pause until there is evidence businesses are not hiring at such a pace. If Friday’s report holds true, it signals wages are likely to levitate further, a leading indicator of inflation and economic activity broadly.

If the Fed cannot smother inflation, it will again percolate through the economy. Once inflation ebbs and flows, it will be much more difficult to tame. Fed Chair Powell gets a rare ‘do-over’ today, typically only reserved for backyard football or the final quarter of the AFC Championship game. In an interview with David Rubenstein at the Economic Club of Washington, D.C., at 11:40 am CT, will we hear Powell’s rhetoric account for the latest data? Or will we hear another victory lap touting disinflation? Let us not forget the Cleveland Fed Inflation Nowcast model forecasts January CPI at +0.63%, a seven-month high.

Technicals: E-mini S&P futures are little changed ahead of the opening bell, while +0.8% on the month. Although price action has pared back since Friday, E-mini NQ futures are still +3.3% on the month. Strong resistance in the E-mini S&P has developed at Friday’s initial spike low after Nonfarm Payrolls of 4132. Much of this week’s price action in the E-mini NQ futures has traded at that spike low of 12,558 but has ultimately been contained below overhead resistance aligning with Friday’s settlement. Yesterday, an early rally attempt in each struggled in front of Friday’s settlement gaps of 4147.75 in the S&P and 12,624 in the NQ, aligning to create additional resistance. Though the tape has softened from last week, underlying strength has kept price action buoyant above significant levels of support, most pronounced being major three-star support in the S&P at 4106.25-4109.25, with NQ’s first level coming in at 12,414-12,431. A break below these levels could open the door for a windfall of selling that takes the S&P down to rare major four-star support at … Click here to get our (FULL) daily reports emailed to you!

Crude Oil (March)

Yesterday’s close: Settled at 74.11, up 0.72

Fundamentals: Crude Oil has rebounded as much as 5.1% from yesterday’s low of 72.25 on Chinese demand and uncertainty tied to the earthquake in Turkey. Saudi Arabia raised its official selling price for March loading to Asia for the first time in six months, exuding their anticipation of an improving demand landscape. Yesterday’s earthquake in Turkey stopped Oil flows from both Iraq and Azerbaijan. Although it is said that Azerbaijan flows have restarted, weather delays and aftershocks have halted the flow of Iraqi Crude. Persisting uncertainties are helping to keep an early bid, but we are likely to hear an update in the coming hours that could create a volatile environment before the focus shifts to U.S. inventory data. Early estimates are for +2.15 mb Crude, +1.35 mb Gasoline, and -0.525 mb Distillates.

Technicals: In yesterday’s Morning Express, we highlighted a trend line dating back to 2016 in WTI Crude Oil but overlooking the pandemic fallout. This line certainly raises the ante on how critical the $70 level is, and so far, the bulls have defended the mark. We have said many times before that Oil is typically in a bull market above $70 and a bear market below $50 and only incurs vicious volatility in between. The rising tape faces strong overhead resistance, highlighted in the levels below. Yesterday’s price action violated, but responded to, and did not close below, major three-star support at 72.74-73.10, a new line in the sand. The tape has cleared previous resistance at 74.97-75.37, a level that will act as our Pivot and point of balance on the session. Below there, we now have major three-star support at … Click here to get our (FULL) daily reports emailed to you!

Gold (April) / Silver (March)

Gold, yesterday’s close: Settled at 1879.5, up 2.9

Silver, yesterday’s close: Settled at 22.237, down 0.168

Fundamentals: Gold and Silver are repricing the Federal Reserve’s terminal rate within the same means described in the S&P and NQ section. The U.S. Dollar has strengthened as a byproduct of this repricing and has become a headwind to the commodity story and risk-landscape. As for the U.S. Dollar Index specifically, it is comprised of 57% the Euro. Asset Managers and Funds raised their net-long position in the Euro to a fresh record in the week ending last Tuesday. If the U.S. Dollar continues to rise, it will force those to sell, encouraging exacerbated weakness in the near-term, a factor that would continue to weigh on Gold and Silver in the near-term. As we look to today specifically, it is all about Fed Chair Powell’s interview at 11:40 am CT.

Technicals: Although we hold a Neutral Bias, we tend to believe there is a bit more downside in Gold and Silver in the near-term. Rally attempts have been contained by first resistances, major three-star levels at 1893-1897.9 in Gold and 22.73-22.88 in Silver. For now, continued price action below our momentum indicator that aligns as our Pivot and point of balance at 1883-1888 in Gold and 22.35-22.40 in Silver opens the door to a test of rare major four-star support in Gold at … Click here to get our (FULL) daily reports emailed to you!

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Originally Posted February 7, 2023 – Fed Chair Do-Over