It is Fed Day, the committee’s policy decision, economic outlook and interest rate projections are due at 1:00 pm CT. Yields of longer duration Treasuries are climbing as many analysts say a dovish Fed is simply not enough anymore. Although inflation has not shown up via headline economic indicators, it certainly has arrived. We have pointed to it here many times over; the price of Lumber has doubled to a record, prices across the energy space are at the highest level since 2018, and many agriculture commodities are at multi-year highs. The committee’s steadfast notion that there is no inflation and any sign of such will be transitory has suppressed short-term rates but lifted the ceiling farther out the curve. A melting pot of the notion that such unprecedent levels of accommodative policy will eventually create massive inflation, the aforementioned real price inflation in commodities right now, an increase in economic activity due to reopenings, and massive debt printing has cratered the bond market. As we have pointed to many times before, such an increase in rates will force investors to choose from a between risk-free return or expensive stocks. The Fed’s handling of this melting pot today will be critical.
The committee can stay the course and remain dovish, but simply saying they will allow inflation to run hot won’t be enough to control the long end of the curve. If reiterating their accommodative stance until full employment is their only course of action, they must emphasize underemployment levels, deflecting from the headline U-3 number. As of February, U-3 is 6.2% versus a U-6 of 11.1%. Furthermore, it is no secret that without fiscal measures from Washington in December and again last week, the jobs picture had quickly deteriorated. Reopenings certainly will help, but there are parts of the job market that will not return, ever.
You may have seen the acronym SLR this week. It stands for Supplementary Leverage Ratio and refers to the amount of equity a bank must hold relative to their leveraged exposure. During tightened cash conditions, the Fed has relaxed SLR calculations to exempt U.S. Treasuries. At the onset of the pandemic, exempting U.S. Treasuries allowed banks to hold more leverage, so to speak, this demand supported the Treasury complex and thus suppressed rates. The deadline for this exemption is March 31st, but the Fed could address extending it today.
Last, but certainly not least is yield curve control. You may have heard someone point to Operation Twist, we have here. This was implemented by the Fed initially in 1961 and then again in 2011. Here, the Fed sells shorter dated Treasuries and buys farther down the curve. The result is an artificial flattening of the yield curve; 2-year Note yields inch higher ever so slightly and 30-year Bond yields fall to a larger degree. The Fed is currently buying bonds at a pace of $120 billion per month, extending the duration of these purchases will support risk assets.
E-mini S&P (June) / NQ (June)
S&P, yesterday’s close: Settled at 3952.50, down 5.75
NQ, yesterday’s close: Settled at 13,141.25, up 72.00
Technicals: The S&P traded to a record high of 3970.25 yesterday but failed to chew through our long-standing major three-star resistance at 3965-3976 and has sense retreated about 1%. The NQ’s rebound made it as high as 13,287 yesterday but key resistance at 13,212-13,269 slowed the bulls in front of major three-star resistance at 13,341. The two-day surge elevated our momentum indicators and the weakness that began late yesterday has decisively brought the tape below them. For this reason, ahead of the Fed, we will maintain a more Neutral near-term outlook, but remain Bullish in Bias specific sectors and over a more intermediate to longer-term timeframe. For instance, bank stocks are up about 1% ahead of the bell. Our momentum indicators this morning align with settlement to bring first key resistance levels and levels that each index must trade through and hold above in order to invite added buying. To the downside, they are moving into first support levels. For the S&P, this is key support at 3932.75-3937.50, but for the NQ, this is major three-star support at 12,900-12,924 and we have said a close below here will neutralize the latest stage of the rebound as it defines the week’s strength.
E-mini S&P (June)
Resistance: 3952.50**, 3965-3976***, 4004.25-4009.25****, 4039**, 4067***
Support: 3932.75-3937.50**, 3904.50-3911***, 3886.75****
Resistance: 13,125-13,141*, 13,212-13,269**, 13,341***, 13,489-13,500***
Support: 12,900-12,924***, 12,739-12,750***, 12,598***
Crude Oil (April)
Yesterday’s close: Settled at 64.80, down 0.59
Fundamentals: April-December spread is coming in nicely ahead of today’s options expiration. We continue to favor a softening of the backwardation and will look to extend this trade into the May contract this week. EIA inventory data is due at 9:30 am CT. Yesterday’s private API posted a surprise draw and this initially supported prices. Expectations for today’s official EIA data +2.964 mb Crude, -2.996 mb Gasoline, -3.379 mb Distillates. The rebound in estimated production should be closely watched. Remember, we have said to keep a close eye on news around Iran-China. Overall, once we get through the EIA data, today’s Fed meeting will be front and center and impact risk-assets broadly.
Technicals: Price action is again moving into major three-star support at 63.81, the third test in three days. A response to this support, once again, would likely create a tailwind of buying. Our momentum indicator is trailing the selling and has come down to 64.65 as of this morning, a move above here would get the ball rolling. Still, we must see a close above 66.45-66.60 in order to create a path of least resistance to $70. A break below support would open the door to 61.50-61.80. Such would bring a terrific opportunity to buy.
Resistance: 65.39-65.61**, 66.45-66.60***, 67.98**, 70.00***
Support: 63.81-64.25***, 63.13**, 62.58**, 61.50-61.80***
Gold (April) / Silver (May)
Gold, yesterday’s close: Settled at 1730.9, up 1.7
Silver, yesterday’s close: Settled at 26.003, down 0.285
Fundamentals: Today’s Fed meeting is front and center. A continued rise in Bonds and/or U.S. Dollar strength will pressure Gold and Silver. Shifts in policy or communication as detailed in the S&P section could and should support the metals complex.
Technicals: Both Gold and Silver continue to flirt with major three-star resistances at 1727.5-1732.9 and 25.97-26.23. Over the last four sessions, price action has been steady at and just below these levels for the most part; we must see a close above here in order to invite added buying that would take Gold to 1757.4-1761 and Silver to 27.08-27.34. There certainly have been rally attempts for each, but never a truly coordinated push and each attempt has been slammed by selling. Given such a stagnant trade, our momentum indicators align with those major three-star resistance levels. To the downside, first key supports have battled to hold waves of selling in a constructive manner, but none of that matters if price action cannot clear resistance. We remain upbeat in that if such does fail, the downside is limited; the sellers have already sold.
Resistance: 1727.5-1732.9***, 1744**, 1757.4-1761****
Support: 1719.8-1721**, 1705.6**, 1698**, 1688-1690**, 1671-1680***
Resistance: 25.97-26.23***, 26.54-26.67**, 27.08-27.34***
Support: 25.85**, 25.40-24.51**, 24.77-25.00***
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Futures trading involves substantial risk of loss and may not be suitable for all investors. Trading advice is based on information taken from trade and statistical services and other sources Blue Line Futures, LLC believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades. All trading decisions will be made by the account holder. Past performance is not necessarily indicative of future results.