Inflation, the Fed, and Pace of Taper | Morning Express

PPI, All Commodities

NQ with range support levels

E-mini S&P (September) / NQ (Sept)

S&P, yesterday’s close: Settled at 4440.50, up 10.50

NQ, yesterday’s close: Settled at 15,019, down 25.00

Fundamentals: The S&P and Dow finished yesterday at fresh records, capitalizing off yields being subdued on inflation data (CPI) not running hotter than expected and a strong 10-year Note auction. The NQ has been consolidating since the reversal in Treasuries last Wednesday and the stronger than expected jobs report on Friday. The table is now set for this morning’s PPI data and weekly Jobless Claims.

The Producer Price Index is not watched as closely as yesterday’s Consumer Price Index, but the prices producers get paid at the top of the food chain certainly cannot be ignored. At the end of the day, those costs get passed down to the consumer. In fact, it was a surprise surge of 1.3% MoM in February’s PPI that alluded to an imminent rise in broader inflationary indicators in the coming months. Unlike CPI, the headline PPI that includes food and energy is watched most closely. Expectations are for a rise of 0.6% MoM and for YoY to match last month’s +7.3%, the highest in a decade.

Initial Jobless Claims are expected to drop by 10,000 to 375,000. The CARES Act, passed last March, has provided unemployment benefits that are set to expire after Labor Day. About half of states have already done away with these and it certainly had an impact on job creation in June and July. Continuing Claims are expected to hit a new pandemic low at 2.88 million. Weekly Claims data will be watched closely by both the Federal Reserve and market participants in order to judge August job growth and not only secure a taper announcement as late as the September Fed meeting but begin estimating the pace of decreasing monthly asset purchases.

We began speaking on this yesterday, it is now less about when a taper will be announced and more about the pace of tapering the $120 billion in monthly bond purchases. Those most hawkish might argue for a six month timeline and those more dovish could make the case for taking twelve months or even longer. If inflation proves to be much more than transitory and job growth steadfast into the autumn, it will pave the way for a faster taper. Although it is too early to tell, Fed Chair Powell could signal a general pace at Jackson Hole, but ultimately, this increases the ante of each data point. If we look back to Fed Chair Yellen’s tightening cycle, there was a quick shift from a ‘wait and see’ dovish rhetoric to ‘here is a more hawkish timeline’ (this happened with both the pace of tapering hikes). At the end of the day, the tightening was very balanced, but slower than first thought at the onset. Although many Federal Reserve committee members have begun turning less dovish and hawkish, it remains to be seen what will spark a shift in Fed Chair Powell’s narrative. A glimmer of hawkishness in June quickly receded due to the newest wave of the pandemic, proving that there are many factors at play.

As for this new wave, it seems to have had a bullish impact. At minimum, new restrictions from the world’s top two economies would seemingly be a deflationary event. Furthermore, it gives credence to the ‘wait and see’ approach. However, if the curve quickly flattens as we have seen in Europe, inflationary tailwinds could reach new peaks and that might be enough to shift Fed Chair Powell’s rhetoric just as his predecessors did.

Technicals: Yesterday, the S&P spiked to a high of 4443.25 upon CPI that was not hotter than expected. After digesting the spike early in the session, price action has overall been tethered to this area. This happens to be just below our next major three-star resistance mark at 4446-4449. However, the NQ is digesting its recent run and holding ground constructively at our 14,997 support and the round 15,000 mark. Our momentum indicator in the S&P is rising, now aligning with what was a pocket at highs achieved earlier in the week; steady action above 4437.50 continues to support higher prices. Below here is first key support at 4425-4429, an area that has incurred significant volume over the last week. Our momentum indicator in the NQ aligns to create first support with that 14,997. Yesterday’s post-CPI spike and fizzle out occurred right in front of strong resistance 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 (September)

Yesterday’s close: Settled at 69.25, up 0.96

Fundamentals: Crude Oil has maintained a large trading range as it gains ground toward the psychological $70 mark. Last night, it traded to a high of 69.62 before retreating. The whipsaw yesterday came as prices slipped after the White House called on OPEC+ to raise production and then rose again on reports they are discouraging added production domestically. Overall, the weekly EIA inventory report came ahead of the latter and underwhelmed; Crude and Gasoline both did not draw as much as expected and Net Imports decreased. We are now seeing a wave off the session highs after the IEA warned of a slowdown in the recovery of demand due to the Delta Variant in their Monthly Report. Although OPEC’s Monthly Report kept demand expectations stable, they warned of a coming increase in U.S. production. Also, hotter than expected PPI data helped bid the U.S. Dollar.

Technicals: The session high stopped right in front of key resistance at 69.69 and an early morning pullback is being underpinned by our recurring pocket that is now major three-star support at 68.28-68.62. Furthermore, our rising momentum indicator will prove to be a point of balance on the session. Continued action above both levels is near-term supportive for a move towards major three-star resistance 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 (Sept)

Gold, yesterday’s close: Settled at 1753.3, up 21.6

Silver, yesterday’s close: Settled at 23.488, up 0.096

Fundamentals: Gold had a terrific session yesterday, capitalizing on CPI that was not hot and a strong 10-year Note auction (record foreign demand), to rebound back to the scend of the crime and a critical level of technical resistance. However, the U.S. Dollar is holding ground early today on hotter than expected PPI and pandemic low Continuing Jobless Claims. Please refer to our S&P/NQ section discussion on PPI, Jobless Claims, and Fed policy. Remember, the U.S. Dollar is at an inflection point; if it breaks out against a basket of currencies via the Dollar Index and against the Chinese Yuan, it will weigh on Gold. Silver was much more unenthusiastic and is down again this morning, U.S. Dollar strength is proving to be a significant headwind. There is a 30-year Bond auction at noon CT and it will prove critical. Does the foreign demand show up for the longer duration debt?

Technicals: Gold extended gains overnight to nearly ping Friday’s settlement and major three-star resistance at 1763; this is a critical level that Gold must close above in order to begin repair of the damage from late last week. The wave of strength in such a rebound has created a floor of 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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