Gasping For Air | Morning Express 06/14/22

Posted: June 14, 2022, 8:53 a.m.

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

S&P, yesterday’s close: Settled at 3753.50, down 147.00

NQ, yesterday’s close: Settled at 11,327.50, down 540.25

Fundamentals: U.S. equity benchmarks are gasping for air, and they may get that much-needed breath, providing a light at the end of the tunnel for investors to set their sights on. The Federal Reserve begins their two-day policy meeting today and will conclude with a decision to hike rates. But, by how much?

For weeks, a 50-basis point hike was telegraphed by the committee and Fed Chair Powell himself. Friday’s headline CPI data, a 40-year high at 8.6%, was a wake-up call that inflation is not “abating” as the Fed expected. Markets and participants have gone into shock; the Fed faces a winless battle against inflation. Or does it?

The Fed’s mistake was made last year by not tightening policy in the face of President Biden’s helicopter handouts that pumped steroids into the demand landscape. Although we try not to be a Fed-critic, we certainly called them out after Jackson Hole. With that said, their hawkish pivot in December and the rate hikes that began in March are still percolating through the system. There are also factors such as supply chains and historically-poor energy policy, domestically and around the globe, in which they cannot control. Given the timing and such geopolitical headwinds to cooling inflation, April and May were never meant to be inflection points for inflation. We have been steadfast in saying that inflation data for June, July, and August will be most crucial, leading into an ‘Inflation Showdown at Jackson Hole’.

May’s hot read could be just what the Fed needed in order to force them in making the necessary impact on those summer months. Rate markets are now pricing in a 90% or higher probability the Fed hikes by 75 basis points tomorrow. One week ago, the probability of such was only 3.9%. Something interesting happened late yesterday as those probabilities barreled towards certainty, rates receded. The U.S. 10-year tapped a high of 3.44% yesterday, right as prices washed out after settlement. The 10-year now sits near 3.30%.

Sentiment is extremely negative and worsening. Also on Friday, Michigan Consumer Sentiment for June came in at a record low of 50.2. Dividing the data by Political Party, Republicans came in at 33.5. As for Democrats, they came in at 71.3. To put this in perspective, the overall read has not sat steadily around 70.0 or lower since the Great Financial Crisis and those stagnant growth Obama years into 2011. Yesterday, the Federal Reserve Bank of New York released a survey showing consumer’s inflation expectations for one-year ahead jumped to 6.6% in May from 6.3% in April. Today, the New York Times’ front page print edition had a chart of the S&P, and their online edition has a chart of gas prices. Not just every newspaper and magazine cover, but everywhere you look and listen, the negativity can be found and felt.

A buy the rumor (negativity), sell the news event might just be in the works given these dynamics, Fed expectations, rates, and sentiment. We view Wednesday’s Federal Reserve meeting as having the ability to bring that much-needed breath and providing a light at the end of the tunnel for investors to set their sights on.

Today’s economic calendar is highlighted by U.S. PPI. Remember, producer prices are a leading indicator for consumer prices. The data-set was actually a touch cooler than expected and could pave the way for that much-needed breath. Headline came in at 10.8% YoY versus 10.9% expected and +0.8% MoM versus +0.8%. Core came in at 8.3% YoY versus 8.6% and +0.5% MoM versus +0.6%. Tonight, a deluge of data from China for May, including Industrial Production, is due at 9:00 pm CT.

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NQ (September)

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Crude Oil (July)

Yesterday’s close: Settled at 120.93, up 0.26

Fundamentals: Crude Oil is back at it again today. Price action early yesterday succumbed to the broader risk-environment’s undertow, but quickly responded to strong support to close strongly and decisively back above $120. Helping to underpin yesterday’s strength was nearly a full shutdown of production in Libya. The country’s political turmoil has shutout 1.1 mbpd of its 1.2 mbpd. Today, OPEC’s Monthly Report is adding fresh tailwinds after data showed the cartel produced 1.05 mbpd below its quota in May. In fact, OPEC as a whole produced 176,000 bpd less in May than it did in April. How can they plan to add production in the coming months if they simply cannot meet lower levels? As today unfolds, traders want to keep a pulse on the broader risk-environment, and an eye out for domestic inventory estimates.

 

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Gold (August) / Silver (July)

Gold, yesterday’s close: Settled at 1831.8, down 43.7

Silver, yesterday’s close: Settled at 21.255, down 0.676

Fundamentals: The goal posts moved once again, and Gold cannot take its next leg higher until that stops. We are referring to the expectations for the Federal Reserve to tighten policy. There is now a 90% probability the Federal Reserve will hike rates by 75 basis points tomorrow. It is imperative for Gold to remain constructive as those expectations play out. If it can, a time will come where inflation cools, and the Fed can take its foot off the gas. When that happens, it will be Gold’s time to shine.

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Silver (July)

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