Inflation Easing, Now What?
Economics / Inflation May 26, 2021 - 12:32 PM GMTBy: Monica_Kingsley
S&P 500 refused to keep early gains, and reversed back into no man‘s land – on little convincing volume. For now, we remain chopping below my 4,180s level, conquering which on a closing basis would a bullish achievement. Until that happens on convincing internals, fake moves in both directions would remain with us.
The Fed telegraphing the talk about talking taper is a first step in preparing the markets not to get surprised by the actual deed, but how far is that one really? Stocks, bonds and currencies aren‘t reacting much – it‘s only commodities that are in consolidation mode, but this can be chalked down to inflation expectations calming down over the prior three trading days. Until the Fed truly moves or makes its forward guidance as unequivocal as can be in this respect, the markets would be in a doubting attitude (or at a minimum, a wait and see one):
(…) The market simply isn‘t convinced the Fed is serious about taking on inflation through (gradual) removal of the punch bowl – or about shaping its forward guidance credibly this way (yet). Inflation expectations are cooling down a little, and the Treasury market is tracking them closely. But this doesn‘t mean that bonds are taking the central bank seriously – this move is part and parcel of the transitory vs. getting (practically permanently unless a Fed game changer arrives – still unlikely) elevated inflation readings debate.
While I think that the red hot CPI inflation would die down a little (i.e. not keep rising ever as steeply as was the case with Wednesday‘s data) once the year on year base to compare it against normalizes, a permanently elevated plateau of high and rising inflation would be a reality for more than foreseeable future simply because the Fed would be as behind as Arthur Burns was in fighting the 1970s inflation, and upward price pressures in the job market pressures would kick in.
Thus, look for the Treasury market calm to continue, affecting the defensive sectors and to a certain degree tech too. Technology isn‘t being rotated to anyhow strongly – the reopening trades are the star performers as $NYFANG lags behind. Tech though rebounded off very oversold levels, and isn‘t likely to revisit them. That‘s the essence of my (moderately but still) bullish Nasdaq calls and open S&P 500 profitable positions.
Gold and silver have been going different ways, with the white metal driven by commodities giving off air. The gold sector though remains well positioned as the miners keep more or less pulling ahead, nominal yields aren‘t rushing headlong to the upside, and inflation isn‘t turning around. Copper relative to the 10-year Treasury yield remains a watchout, with the red metal relevant especially to silver. For now, gold remains a coiled spring with limited downside until conditions materially change, and my open gold profits can keep growing at their own pace.
Crude oil found a daily bottom that looks promising to hold at first sight, but the oil index ($XOI) gave up all of its intraday gains. In this light, the $WTIC rebound looks a bit stronger short-term than could have been expected, meaning that a downswing attempt in black gold can‘t be excluded. At the same time, upside potential is greater though.
Bitcoin made one more attempt on Wednesday‘s lows on Sunday, and Ethereum undershot them. Both have swung higher but remain well below Friday‘s levels – the lookout remains tense until at least $38,000 in Bitcoin and $2,400 in Ethereum are taken out convincingly.
Let‘s move right into the charts (all courtesy of www.stockcharts.com).
S&P 500 Outlook
S&P 500 didn‘t undergo a reversal on Friday, the volume or conviction of the sellers wasn‘t there. Contrast that with Nasdaq (black line), and the turn lower looks menacing – at first sight only. There wasn‘t any real volume to talk of in QQQ (and neither in SPY for that matter). Tech overall would keep underperforming, but has been beaten down a bit too much.
Credit Markets
- High yield corporate bonds performed better than the investment grade ones while long-dated Treasury yields once again retreated. The sentiment is turning back to risk-on.
Technology and Value
Tech driven by its riskier segments keeps rising while $NYFANG did drag its feet on Friday. Value though saved the day in spite of giving up all intraday gains as TLT repelled its bears.
Gold, Silver and Miners
Gold sector is cooling off without giving up gained ground. Miners aren‘t leading to the downside while nominal yields could provide a greater tailwind to the yellow metal. Thanks to inflation expectations and commodities at the moment, it doesn‘t.
Silver is lately losing altitude as much as copper does, but the red metal‘s ratio to 10-year Treasury yield isn‘t pulling the yellow metal down – because of real rates barely changing.
Crude Oil
Crude oil is basing, and the forces between the bulls and bears are more than even now – current prices are attracting buying interest, which might however take a while to materialize in sustainably higher prices unless the oil index recovers too.
Summary
S&P 500 bulls remain supported by the credit markets, with value pulling ahead again while tech‘s worst clearly appears over. Time to be bullish both the 500-strong index and look for a Nasdaq entry point as this April started sideways trading full of fake breaks higher or lower, is slowly drawing to its end.
Gold and miners defend gained ground, but look for silver to remain vulnerable to the downside thanks to the pressure on commodities that I expect from both the bond markets and inflation expectation moves.
Crude oil is stabilizing and the oil index supports higher prices, but one more pullback might be on the cards. And should commodities turn red en masse again, black gold wouldn‘t probably escape.
Neither Bitcoin nor Ethereum have truly stabilized yet, and remain short-term range bound with more selling pressure a distinct possibility. While the worst appears over on a very short-term basis, the dust hasn‘t settled just yet.
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Monica Kingsley
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mk@monicakingsley.co
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