S&P 500, Consumer Price Index, Dollar, Yields, EURUSD, and USDTRY Points to Consider: Both headline and core consumer inflation in the United States exceeded estimates, making it increasingly difficult to claim a ‘transitory’ environment. The Dollar was hit by the move, and implied Fed rate hikes rose, but overall risk assets didn’t seem to react as strongly. With Powell’s testimony, three central bank rate decisions, and US earnings to come, the market may have become jittery. Before a larger event, the US CPI re-establishes a critical theme. The June US CPI (consumer price index) release was every bit the tense event that market participants expected and the Fed hoped to avoid. The world’s largest economy’s uninterrupted inflation surge is more than simply a whip for the US Dollar, Treasury yields, and local capital market assets. It piques attention in the function of global monetary policy in keeping risky assets elevated in general. A ‘tighter’ policy regime, in general, is a burden for risk markets, especially when such assets are stretched. Although I have argued that many speculative appetite benchmarks are excessive in comparison to traditional value metrics, the major US indexes retain a particular standing among even the most bullish of markets. Despite their stretched state – or possibly because of it – the S&P 500, Dow, and Nasdaq 100 did not react dramatically to the inflation figures. After setting intraday records, the SPX and NDX ended the day slightly lower than Monday’s closing. This may be interpreted as proof that the juggernaut can’t be stopped, but I believe it’s more likely to be a foreshadowing of what’s to come for global risk in the following 36 hours of trading. S&P 500 Chart with 100-Day Moving Average and Spot-MA Disparity (Daily) Tradingview platform was used to create this chart. When looking at the inflation figures more closely, there is a major discussion between those who believe high price pressures are temporary, as the official western central bank line suggests, and others who believe the additional burden is permanent. In terms of raw numbers, the June headline CPI figure greatly above expectations, rising at a rate of 5.4 percent, putting it on track to surpass the 2008 high and return to levels not seen since 1991. With that filter indicating a 4.5 percent year-over-year gain, we are now at that historical perch, excluding unpredictable energy and food prices. For those who believe inflation will fall, the impact of used automobiles and recent price drops in particular commodities appears to be a clear temporary element. However, indicators that are more closely linked to consumer behavior are rising as well, and more corporations (such as Pepsi and Conagra in their earnings reports on Tuesday) are warning that greater raw material costs will be passed on to consumers. In the end, the Fed will have to solve a complex equation to determine the optimal course of action. It could intervene ahead of time, causing a financial crisis that would be difficult to reverse. Alternatively, it could allow for high inflation to become stressful but manageable. There isn’t enough here to compel them to make a decision. Year-Over-Year Change in US CPI and Core CPI (Monthly) FRED Fed Economic Database Chart with Data from the Bureau of Labor Statistics The focus on monetary policy is only going to get more intense in the future. While I don’t believe the Fed can be coerced into raising rates, I do believe we’ve reached the stage where we can begin the process of acclimating the markets to upcoming normalization. This is a significant difference in action, but it’s also a cunning strategy for instilling complacency in the face of a phony dovishness. In the case of Fed Funds futures, the implied projection for rate hikes from the central bank until the end of 2022 has surged to 23.5 basis points (near certainty of one hike) from 15.5 basis points at the end of last week. Under the current circumstances and given the FOMC’s own SEP, I believe that is a reasonable assumption. The real starting gun, though, is the declaration of the commencement of taper (a reduction in regular asset purchases). Forward guidance, then taper start, then taper finish, followed by rate hikes and maybe balance sheet sales, was always the road to normalization. Even SF Fed President Mary Daly stated last week that it was appropriate to talk about tapering, but she made it clear that an increase is still a long way off. That is likely true; yet, the taper is a critical event for a forward-looking market that has found deep comfort and complacency in central bank support. Implied Fed Rate Hike Through 2022, DXY Dollar Index Chart with 20 and 100-DMAs (Daily) Tradingview platform was used to create this chart. There isn’t a single challenger who could bring more attention to the impact of Fed policy on the global risk picture than the Fed. However, the global strategy as a whole is far more essential than the US course. Because of the high level of inflation in the United States, the global spectrum will become even more polarized. The Bank of Canada and the Reserve Bank of Australia have made a noticeable shift toward normalization (easing up from severe dovish positions) in recent months. Furthermore, the European Central Bank, the Bank of England, and even the Bank of Japan have all expressed cautious rhetoric that may be interpreted as trial balloons. It will be difficult for the speculative rank to ignore the ramifications if the world’s largest safety net begins to roll up all at once. So, while I feel that relative perspectives such as USDJPY (Fed vs BOJ projections) have lots of market moving potential, the consequences for the otherwise corpulent market are far more spectacular. Chart of Major Central Banks’ Relative Monetary Policy Positions John Kicklighter designed the graph. What to Watch This Week (Wednesday and Thursday) Looking ahead to the next session, there is a lot of potential for volatility. While I am keeping an eye on factors such as the continuation of the US earnings season (Back of America, BlackRock, Citi, and Wells Fargo are all scheduled to report) and China’s 2Q GDP, which is due early Thursday Asian hours, I believe the attention already focused after the CPI release has the greatest potential for momentum. While a lot of central banks are expected to disclose their policy mix today, the United States isn’t out of the spotlight yet. Before the New York open, the upstream inflation measures (PPI) will be released. Alternatively, Fed Chairman Powell’s upcoming testimony on the US economy before the House of Representatives is an excellent opportunity to challenge the central banker on what will be done about the risk of inflation, with calls for reassurance. Whether Powell succumbs to the pressure or manages to calm down, it could provide a timely impetus for EURUSD to break through the bottom of a multi-month wedge. EURUSD Chart with 20 and 100-Day Moving Averages (Daily)Chart created on Tradingview Platform There are three genuine rate decisions to absorb today outside of the US monetary policy orbit. The Reserve Bank of New Zealand is the first in the Asian session (RBNZ). While this group has been extremely accommodating throughout the epidemic, the overheated housing market and, increasingly, the broader economy are starting to fuel speculation that this historically carry-positioned benchmark may begin to normalize. Given that the group has already tapered and there has been anticipation of a further step, the Bank of Canada (BOC) is likely the most powerful of the major central banks. If they decide to limit asset purchases much more now, it might have a significant impact on the Canadian Dollar, with the USDCAD falling to long-term support near 1.2000. The Turkish Central Bank rate decision, on the other hand, is the event that I’m most interested in. This is not a worldwide event that will easily spill over, but it is a loaded emerging market event. Because of their disagreement on the best policy approach, the country’s president changed the bank’s head in March. Despite Erdogan’s opinion that interest rates should be lowered, the newly appointed head of the central bank has yet to take action. Perhaps because the USDTRY is already at historic highs. On the Tradingview Platform, a chart of the USDTRY with 100 and 200-day moving averages (daily) was created./n
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