A Light at the End of the Inflation Tunnel | Morning Express 07/07/22
Posted: July 7, 2022, 9:47 a.m.
E-mini S&P (September) / NQ (September)
S&P, yesterday’s close: Settled at 3848.25, up 14.25
NQ, yesterday’s close: Settled at 11,880.25, up 71.75
Fundamentals: The S&P and NQ finished higher yesterday for the third session in a row. The late day boost came after the Federal Reserve Minutes from their June meeting. Although committee members largely agreed that another 75 basis point hike on July 27th is warranted to contain inflation, we believe a light at the end of the tunnel has started to appear. First, the odds for a 75 basis point move later this month have risen to 93.9% from 90.9% yesterday and 82.6% one week ago. We do agree, it is in the bank’s best interest to forge ahead and lift away from zero while they can. However, this plays right into our ‘Inflation Showdown at Jackson Hole’. We have stated our thesis that inflation meaningful retreats during June, July, and August via data released in July, August, and September, opening the door for a slower pace of hikes and even a pause. Since May’s hot CPI read on Friday June 10th, the Bloomberg Commodity Index has fallen 20% from its peak on Monday June 13th. Furthermore, 5-year Forward Inflation Expectations have fallen from an April peak to the lowest since February and the 5-year Breakeven Inflation Rate has fallen from a March peak to the lowest since September. We closely watch the Cleveland Fed Inflation Nowcast, and this points to Core CPI for June at 5.66% as of yesterday, down from 6.0% in May, and updates each day at 9:00 am CT. However, the headline estimate, which includes Food and Energy, remains elevated at 8.67%. We believe given the recent trend in inflation the Nowcast is likely to overshoot its expectations. The Fed’s goal is to drive down inflation from the demand side, by tightening policy. In yesterday’s Minutes, they pointed to Business Fixed Asset Investment slipping in the recent month. Additionally, May’s PCE read last week showed Consumer Spending MoM for May at 0.2%, the lowest since December and below the 0.4% expected. Furthermore, that for April was revised down from +0.9% to +0.6% and as a month over month read, it makes May’s miss more significant. This all leads into tomorrow’s Nonfarm Payrolls report for June. Job Growth is important, but Wage Growth as a measure of inflation will be absolutely critical.
Do not miss our daily Midday Market Minute, from yesterday.
Bill Baruch joined CNBC’s Power Lunch to discuss the bloodbath in commodities, and what is next.
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NQ (September)
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Crude Oil (August)
Yesterday’s close: Settled at 98.53
Fundamentals: Contrary to the price drop this week, the physical market remains extremely tight and spare capacity is the elephant in the room. Furthermore, time spreads down the Crude curve remained in steep backwardation, tightening only negligibly during this week’s precipitous drop. This tells confirms the demand landscape amid recession fears remains robust relative to supply. Helping boost prices into U.S. hours is also news that China is planning a $220 billion fiscal stimulus program.
We now look to EIA data due at 10:00 am CT. Last night’s surprise build of 3.825 mb of Crude posted by the private API survey along with an increase of inventories at Cushing did little to derail prices. Estimates for today’s official data are -1.043 mb of Crude, -0.48 mb Gasoline, and +1.133 mb Distillates.
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Gold (August) / Silver (September)
Gold, yesterday’s close: Settled at 1736.5, down 27.4
Silver, yesterday’s close: Settled at 19.159, up 0.038
Fundamentals: Gold and Silver have firmed up slightly from the week’s low, but the ugly stretch through this week cannot be ignored. U.S. Dollar strength has certainly become the largest headwind to precious metals and commodities broadly, and Nonfarm Payrolls tomorrow will be pivotal. Also, the 10-year cannot be ignored as the yield has gained about 25 basis points from its 2.747% low and once again closing in on 3.0%. At the end of the day, Gold and Silver can only sustain a rally once the Federal Reserve stops moving the goal posts. Please read our discussion on the Fed and yesterday’s Minutes in the S&P/NQ section.
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Silver (September)
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