Buy the Rumor, Sell the News | Morning Express | 04-17-23

Posted: April 17, 2023, 9:33 a.m.

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

S&P, last week’s close: Settled at 4163.75, down 9.00 on Friday and up 31.75 on the week

NQ, last week’s close: Settled at 13,181.25, down 28.50 on Friday and up 10.50 on the week

Fundamentals: The Federal Reserve’s May 3rd policy decision is quickly approaching. Last week, a deluge of hard inflation data showed cooling prices and even pockets of disinflation via CPI and PPI, but Fed committee members and Fed Funds futures aligned to exude “more work to do”.

Last week’s hard data revealed Headline CPI Less Shelter dropping to 3.44% in March, down from 4.96% in February. This is a win. Furthermore, the Fed has referred to the Services sector as remaining stubbornly high, and it actually showed signs of disinflation Less Shelter at -0.3% m/m. Even Shelter itself could be viewed as a bright spot, although +0.56% m/m is high, it is below the 3-month (+0.68%), and 6-month (+0.70%) trend. As for PPI, Headline surprised to the downside with a disinflationary -0.5% m/m, versus +0.1% expected with y/y falling to 2.7%, the lowest since January 2021. Lastly, the Import Price Index went under the radar on Friday at -0.6% m/m for March, after -0.2% for February, and -0.4% for January. Prices are falling, and specifically those that producers are paying. Remember, producer prices are a leading indicator of consumer prices.

Do not miss this week’s chartbook, covering inflation trends, Retail Sales, Michigan Consumer data, and much more.

On Friday, Fed Governor Waller, known as the most hawkish 2023 voter, called for more rate hikes because “inflation is still much too high and moving sideways above the 2% target”, additionally the “labor market continues to be strong and quite tight”, he added. It was not only Waller’s comments that rattled markets on Friday but soft data (relative to hard) via the fresh April Michigan Consumer survey that showed 1-year Inflation Expectations rising to 4.6% versus 3.7% expected and up from 3.6% in March. Ultimately, those Michigan Inflation Expectations shocked markets as the Fed looks to inflation expectations as a self-fulfilling prophecy, and here arises opportunity.

Coupled with the tight labor market, Waller and other Fed committee members are also focusing on broad strength throughout the economy. As of Thursday, the Atlanta Fed GDPNow model has Q1 GDP rising to 2.5%, a steady elevation over the last two weeks. Industrial Production has also shown resilience, confirmed by a rebound in NY Empire State Manufacturing this morning. The same goes for Retail Sales; although it disappointed on Friday, the three-month trend due to January’s strength cannot go unnoticed. This is all covered in our chartbook, do not miss it here.

So where does this leave us? The CME’s FedWatch Tool shows the probability of a 25bps rate hike at the Fed’s May 3rd meeting rising to 86.7% today, from 78% Friday morning, and from 72.2% one week ago. On Friday, the U.S. Dollar Index rejected a test of the February 2nd low, and 10-year Note yields have been rising for the last week and a half. For what it’s worth, our CTA Blue Creek Capital Management went short the Euro on Friday, email us at info@bluelinefutures.com to discuss. The market is telling us something, pricing in one more hike from the Fed, and this a complete parallel to 2018. What is another 25bps? The token hike from 4.75% to 5.00% does not really change anything, but it is just that, a symbolic move by the Federal Reserve showing how serious they are in the bank’s fight against inflation.

I (Bill Baruch, author of the Morning Express) will be heading on vacation with my family over the next two weeks. For the Morning Express, I will be updating levels, and there will be no written section. I will be shooting a few videos, keep an eye out for a special Triple Play podcast later this week covering miners. My screen time will need to center on position management across futures and securities with less written communication. Today’s lengthy write-up is meant to help provide a backdrop in how I view the markets and the opportunity within them leading into that Fed decision two weeks from Wednesday. That is where I will conclude below.

At the Fed’s last hike in the 2018 cycle on December 20th, when the S&P was -17% mind you, the bank said it planned to hike two more times in 2019. That never happened. Instead, they cut three times that year, with the first coming in July. Although we currently do not find ourselves in the fear-mongering recession camp, how could you with this data, again look at the chart book, we cannot ignore the fact things will slow. However, between now and then, the Fed cannot allude to any holes in its steadfast mission, and like in 2019 they will squeeze in that one last hike. The opportunity between now and then has begun lifting the U.S. Dollar and rates for what could be a “buy the rumor, sell the news” event, and that is how we plan on playing it.

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