Inflation Is Percolating

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

S&P, yesterday’s close: Settled at 4145.50, down 1.75

NQ, yesterday’s close: Settled at 12,631.00, up 90.50

Fundamentals: The barrage of economic data continues today with January Retail Sales front and center, along with fresh February NY Empire State Manufacturing, both released at 7:30 am CT. Combined with U.S. CPI yesterday and U.S. PPI tomorrow, along with fresh Philly Fed Manufacturing, the data will tell a story.

Yesterday’s January CPI came in above expectations, with headline at 6.4% y/y versus 6.2%. Was it hot? Arguably yes and no, but it signals a fresh wave of inflation could be percolating. The headline month-over-month read was in line with expectations at +0.52%, but this was a seven-month high. There was some disinflation in Durables, falling by -0.06% m/m, but the pace of disinflation is slowing from an average of -0.58% over the last three months. However, Services Less Rent and Shelter, which is referred to as the new Super Core, was +0.56% m/m, above its pace for the last three and six months. Shelter still increased at an elevated +0.74% m/m. Though Shelter is widely known to be the most lagging component, there are real signs the housing sector is beginning to surprise to the upside. All things considered, inflation is beginning to ebb and flow, a parallel to the 1970s and something the Fed must avoid.

What would underpin this ebb and flow? A tight job market and strong consumer. January Nonfarm Payrolls surprised to the upside, with 517,000 jobs created and the Unemployment Rate hitting a new 54-year low. Today brings the highly anticipated January Retail Sales report. Going as far back as mid-December on CNBC, Bill Baruch has lauded this report as absolutely pivotal. We believe it could really surprise to the upside. Yes, December’s read was abysmal at -1.1% m/m for both headline and Core (excluding autos). Those weak results encourage an easier snapback in January. However, over the last three years, two of the best three reads have come in January. Not just snapbacks but blowouts. Ultimately, holiday spending is not what it used to be, and people can order anything on demand. When January rolls around, people are ready to spend on perceived deals and enjoy the New Year. Have you looked around? People are back in the office, and they are out at restaurants, all encouraging more and more spending.

Although there is no certainty in how the stock market will react today upon these Retail Sales results, if hot, it begins to support a story that inflation is picking back up. Foreseeably, such would support the U.S. Dollar and extrapolate further Fed rate hikes. After yesterday’s CPI, the 2-year Note did the talking, it rose by nearly 10bps and is now at 4.6%, the highest since November 9^th. The 2s10s spread cratered to a new low of -0.875%. The Treasury complex is certainly telling us CPI was hot and the Fed must be more aggressive.

Do not miss our daily Midday Market Minute, from yesterday.

Technicals: Price action in both the E-mini S&P and E-mini NQ futures remains extremely buoyant. Yesterday’s session brought whiplash to both the bulls and the bears but steadfastly grinded back to the upper end of the day’s volume ranges. However, some selling did kick in on the close, and both the E-mini S&P and E-mini NQ have remained contained overnight within the range formed from yesterday’s late morning low and late afternoon high. The S&P finds significant support at and just above the 4100 mark, not only responding yesterday, but lifting significantly upon Monday’s opening bell, this pocket is defined as major three-star support in our levels below. Similarly, the NQ has built strong major three-star support at 12,352-12,390. Until these respective levels in each give way, the bulls will continue to hold an edge across all timeframes, regardless of some signs of near-term exhaustion. To the upside, a close above yesterday’s post-CPI whipsaw range aligning to create major three-star resistance at 4186.50-4194.25 will be the beginnings of a bull-flag breakout. To the downside, a break below those aforementioned levels sets up for a direct test of our rare major four-star support in the S&P at … Click here to get our (FULL) daily reports emailed to you!

Crude Oil (March)

Yesterday’s close: Settled at 79.06, down 1.08

Fundamentals: Crude Oil has consolidated off its best levels of the week after the White House announced it would sell another 26 mb from the SPR. This morning the IEA is in the news, saying, “World oil supply looks set to exceed demand through the first half of 2023, but the balance could quickly shift to the deficit as demand recovers, and some Russian output is shut in.”

Weekly EIA inventory data is now front and center, and last night’s private API survey posted a massive surprise build of 10.507 mb of Crude, while Gasoline and Distillates also rose, by 0.846 mb and 5.261 mb, respectively. Furthermore, API signaled inventories at Cushing increased by another 1.954 mb, which would mark the seventh consecutive week of increases. Cushing stocks are now at the highest levels since July 2021. Expectations for today’s official report are +1.166 mb Crude, +1.543 mb Gasoline, and +0.447 mb Distillates.

Technicals: Like most markets, Crude Oil experienced volatile conditions around the CPI release. Price action has been contained below our Pivot and point of balance from before the release, now becoming first key resistance at 79.33-79.45; the bears are trying to gain a near-term edge while below here. Still, major three-star support has underpinned broader strength and comes in at … Click here to get our (FULL) daily reports emailed to you!

Gold (April) / Silver (March)

Gold, yesterday’s close: Settled at 1865.4, up 1.9

Silver, yesterday’s close: Settled at 21.873, up 0.021

Fundamentals: Gold and Silver both hit the lowest level of the year overnight and could find additional pressures on the heels of a hot January Retail Sales report; headline +3.0% m/m vs +1.8%, and Core +2.3% vs +0.8%. The U.S. Dollar has been finding its footing ever since the January Nonfarm Payrolls report on February 3^rd, and this has been a direct headwind to the precious metals complex. Today’s Retail Sales exudes a very resilient consumer, and furthermore credit card delinquencies are at extremely low levels, signaling this report was not a one-time event. As we explained in more detail in the S&P/NQ section, a consumer of this strength, coupled with a tight job market (the Unemployment Rate at 54-year lows), is a leading indicator of fresh waves of inflation. Although we believe Gold and Silver will shine again this year, this will be seen as a near- to intermediate-term headwind.

Technicals: Price action in Gold has now chewed through support leading into the 1850 area, and 1850.1-1856.7 will now serve as our Pivot and point of balance. Similarly, Silver has broken below major three-star support at 21.78-21.95. Although this favors the bear camp and encourages continued liquidation, all is not lost, as we have major three-star support in Gold and rare major four-star support in Silver coming in at …Click here to get our (FULL) daily reports emailed to you!

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Originally Posted February 15, 2023 – Inflation Is Percolating