Fight or Flight?On February 1st, the Federal Reserve (Fed) announced a widely-expected 25bps rate hike. This was the rallying cry for the current market rally to continue.
Is this confidence warranted? An interesting note is that the FOMC meeting minutes and the associated press conference appeared contradictory in nature because there was not a straightforward hawkish or dovish narrative across both. The statement was hawkish. Meanwhile, Fed Chairman Powell’s language in the press conference was remarkably dovish, describing the disinflation process as having started and as "encouraging and gratifying". This was the point that markets took as the signal to continue the recent rally. Precious metals, equities, and risk assets have all seen significant post-meeting relief.
The first innings of a recession always appear to be somewhat of a soft landing in which inflation and growth begin to slow gradually. Yesterday’s meeting echoed the idea that recent indicators point to a modest increase in spending and that inflation has eased, precisely what the first innings of a recession would predict. As markets, potentially shortsightedly, adopt the soft landing narrative, the Fed’s lack of pushback against easier financial conditions added fuel to the fire. Given this, it is doubtful that markets will stop rallying until one of two cases occurs: First, if data comes in hot, it potentially frightens markets into thinking the Fed will turn back hawkish and raise rates more than the recently observed 25bps hike. The second scenario is the other extreme. Should data start coming in highly recessionary with lower inflation and weak growth, this will eliminate all believers in the soft landing narrative, thus halting the rally. However, at present, it looks like the market rally of 2023 could continue until either of these scenarios happen. An important thing to note is that whenever inflation has exceeded 5% in the past, it has never come back down without the Federal Funds Rate exceeding the rate of CPI inflation. Considering the Federal Funds Rate is currently between 4.5% and 4.75% whilst CPI inflation is at 6.5%, more rate hikes are on the horizon unless data comes in highly recessionary. CPI data on the 14th of February will provide significant insight into whether or not the Fed will follow the likes of the European Central Bank & Bank of England and go with a 50bps hike rather than a 25bps hike.
Another important thing to note is that Apple , Amazon , and Alphabet (the parent company of Google ) all missed earnings last night. If three of the world's largest companies missed earnings, it does not breed confidence for economic hopes of avoiding a recession. One thing seems certain, the S&P500 is likely to take a hit when the NYSE opens later today.
CPI
Everyone Believes What They Want to BelieveRealty != Belief
The secret to this market is to lower your expectation continually.
Bulls do not realize they are sitting in the largest bull trap ever setup.
Macro bottom still pending... it's more of the same: drop, consolidate, drop.
A wise Bera once said:
Resistance is infinite and unbounded.
When a level is broken, there will always be more resistance higher up.
Support is not though, support is capped at 0.
The Fed's view:
www.federalreserve.gov
What does the Beveridge curve tell us about the likelihood of a soft landing?
"It would be unprecedented for job vacancies (openings) to decline by a large amount without the economy falling into recession. We are, in effect, saying that something unprecedented can occur."
Lagging Crash
Lehman Brothers filed for bankruptcy on September 15, 2008.
The broader stock market did not begin its crash until a week later.
Everyone initially thought Lehman wasn't a systemic risk.
You say crypto crash can not crash stocks with a LAG?
The doom loop is accelerating.
Few understand this.
You Can Have the Cake and Eat it TooCBOT: Treasury Yield Spread 10Y-2YY ( CBOT_MINI:10Y1! CBOT_MINI:2YY1! ), Micro Dow ( CBOT_MINI:MYM1! ), Micro S&P ( CME_MINI:MES1! )
On Wednesday, the Federal Reserve raises its benchmark Fed Funds rate by 25 basis points to a target range of 4.5%-4.75%. The move marked the eighth consecutive hikes that have began in March 2022. The overnight risk-free rate is now at its highest level since October 2007.
Fed Chairman Jerome Powell sends mixed signals in his post-FOMC meeting news conference but appears more dovish comparing to previous speeches.
The Committee thinks that “on-going increases in the target range will be appropriate”. These words send stocks down minutes after the speech begins at 2:30PM.
However, during the Q&A session, when the Fed Chair confirms, for the first time, that “the disinflationary process has started,” the stock market rebounds strongly and finishes in the positive territory for the day.
Other mixed messages:
• Inflation data shows a welcome reduction in the monthly pace of increases;
• It would be “very premature to declare victory or to think we really got this”;
• It’s “possible” that the funds rate could stay lower than 5%;
• Unlikely the Fed would cut rates this year unless inflation comes down more rapidly.
Actions speak louder than words. In two rate-setting meetings, the Fed has slowed the pace from 75 bps to 25 bps. The path is not likely to reverse, and future rate hikes will come down to just two options, either 0 or 25 bps. In my opinion, the terminal rate will end at 5% or 5.25% after the March and May meeting.
In recent months, the “Risk” button has been pressed on for risky assets:
• The Dow is up 19% since October, and the S&P and the Nasdaq are up 17% and 18% for the same period, respectively;
• Gold futures rallies 21% since November, while Bitcoin jumps 58%;
• Tesla and Ark Innovation ETF gain 47% and 33% year-to-date, respectively.
Historically, it’s rare for the stock market to dip two years or more in a row. For the S&P 500, it only happened four times in the last 100 years. The odds favor stock investors in the Year of Rabbits after a brutal double-digit selloff in 2022.
Fed rate hikes and high inflation are like a brake that decelerated the running economy car. Now that the driver’s foot is off the brake, will the economy improve immediately?
Not so fast. We will endure higher costs for months to come. Take the example of food items, once the price goes up, it usually stays up for the year. Sometimes, suppliers resolve to reducing the size of package for the illusion of keeping the same price, a tactic known as “Shrinkflation”. Wages, rent, phone bill, cable TV, utility, homeowner association fees and sales tax also seldom go down. All these point to a sticky inflation. Without massive government stimulus to press the gas pedal, subdued growth is on the horizon.
However, the stock market is forward looking. Investors already see an "invisible foot" on the accelerator and begin buying in the dip. On balance, I’m bullish about risky assets, but would consider protecting my investments carefully.
The inversed yield curve is a proven and tested signal of a potential recession. The 10Y-2Y Treasury yield spread is at -64 bps after the Fed rate decision. The yield spread turned negative last July and stayed below zero in the last seven months.
Major crises could break out unexpectedly, crashing our party. The year-long Russia-Ukraine conflict could intensify, tensions in the Taiwan Strait could escalate, and the US government might not be able to avoid a national debt default.
A Hedged Position on Stock Index Futures
We could consider using the CME Micro E-mini S&P futures to establish a bullish position on the U.S. stock market. The June contract MESM3 is currently quoted at 4177, which is 58 points above the cash index. To protect my position from any adverse market movement, an out-of-the-money put option could be placed at the 3950-strike. If you are more pessimistic, a lower strike of 3840 may be considered.
The benefit of futures over cash index ETFs lies with the leverage. With a smaller margin deposit upfront, investment return could be amplified if the market moves in your favor. The downside is that the loss will also ramp up quickly if the market moves against you.
Put options protect us from any downfall below the strike price. Unlike futures, the maximum loss from a long options position is the premium you have paid upfront. A combination of long futures and long put options is, in theory, limited downside with unlimited upside.
The risk and return tradeoff are asymmetry in this case. As a result, you can have the cake and eat it too!
Happy trading.
Disclaimers
*Trade ideas cited above are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management under the market scenarios being discussed. They shall not be construed as investment recommendations or advice. Nor are they used to promote any specific products, or services.
CME Real-time Market Data help identify trade set-ups and express my market views. If you have futures in your trading portfolio, check out on CME Group data plans in TradingView that suit your trading needs www.tradingview.com
BTC Futures Rising Wedge Forming, confluence with newsI frequently chart the BTC CME Futures chart alongside a normal BTC Exchange chart. The difference between them is that CME is closed for the weekend and operated by a regulated group. This means the CME chart can frequently show different trends/patterns as it removed a lot of the noise, unnecessary wicks, etc that can come from exchanges trading over the weekend.
I'm watching the early stages of this rising wedge forming. It's a bit early to call it a confirmed pattern still but worth putting on the radar. I often like to find confluence in charts aligning with news; I don't trade news but news is often a perfect catalyst for patterns to breakout. So what I have shown in the chart is a pattern that comes to an apex in about a week's time. And we have February right around the corner with a lot of news coming out, specifically the FOMC meeting minutes releasing on February 1st. This would be the perfect catalyst to create some volatility, quickly eliminate overleveraged longs and shorts, and then push for a pattern break of the rising wedge.
Marking this idea as short as I am bearish overall and ready for a market reset, but note that this chart displays an idea where BTC gets one more push higher at the beginning of this week.
Happy to answer any questions people have on this idea!
Is lumber Spiking?This Lumber Weekly chart clearly shows the unique parallell range that confirmed a breakdown.
Now to determine what likely happens next we wait to see if we get a close above or below the weekly key channel Resistance line.
If rates remain soft we will likely get a continuation move to the upside.
AUDUSD Moving Into Technical Resistance After CPIAUD is the mover of the day after CPI yoy jumped unexpectedly to 8.4% in Australia up from 7.3%. Thats big and can potentially mean that RBA will be foreced to raise rates further. AUDUSD is moving aggressively higher, but still trading at some key resistance levels here, with fifth wave. A lot of major currenices are trading at resistance vs USD, so if suddenly USD index would rally, then Aussie can come back down, but would most likely suffer less than others. From a longer term perspective we see AUDUSD clearly in bullish mode for much more upside, but ideally after a higher degree pullback.
Crude oil a leading inflation indicatorTwo observation made the last two years between crude oil and CPI:
1) There were 5 waves up and
2) 3 significant peaks
However, between the last 2 peaks of crude, it was a lower low follow-by its downtrend, and CPI followed this downtrend subsequently.
Among many commodities, crude oil moves the most in tandem with CPI, but crude seems to lead in this study.
Refer to the daily chart on your own, try drawing a downtrend line, you will see crude oil prices has broken above its downtrend line recently. If crude oil is going to transit to an uptrend from here, we will have to track CPI very closely. The inflation fear is still there.
Did a video on this observation last week, refer to the link below.
Crude Oil Futures
Minimum fluctuation
0.01 = $10
0.10 = $100
1.00 = $1,000
10.00 = $10,000
Disclaimer:
• What presented here is not a recommendation, please consult your licensed broker.
• Our mission is to create lateral thinking skills for every investor and trader, knowing when to take a calculated risk with market uncertainty and a bolder risk when opportunity arises.
CME Real-time Market Data help identify trading set-ups in real-time and express my market views. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com
JICPT|DXY is on the verge of rebound on the weeklyHello everyone. Dollar index has retreated from the high around 114 created in late September when investors expected inflation would be cooling soon.
To make it clear, I also inserted U.S core CPI year-over-year data on the weekly chart. You can refer to the purple line. Obviously, The dollar index moved in line with the CPI data. Both topped around the same time.
When we looked at the DXY rising angle, we can see it accelerated to the upside since March 16, 2022, when Fed raised interest rate for the first time since the pandemic by 25bps. The main driving force behind the move is inflation. So what's next after the Dollar index took a dive of 50%.
From my point of view, the index may held above 100 for a while(relative strong) until inflation is confirmed to go back to the 2% target. That may happen in the H2 2023. The reasons are below:
1. After the dramatic move, sellers need to take a rest around key zones(fib 50-61.8%)
2. Dollar index has been over sold.
3. 100 combined with a strong demand zone is likely to prevent it from further drop.
If I'm right, there will be short opportunities for gold, and other currencies, e.g., EUR.
What do you think? Give me a like if you're with me.
The Revival In the past two weeks, the market has seen a significant increase in bullish momentum leading many to believe that the proposed ‘echo bubble’ that many predicted for 2023 may indeed play out.
It was initially unclear what was driving this momentum but the market gaining confidence that CPI will continue to decrease, as well as a temporary liquidity increase thanks to the ongoing US Debt Ceiling increase crisis, seem to be important factors. The U.S. CPI data published on the 12th of February was in line with expectations with a 0.1% reduction. There is evidence to suggest that if CPI inflation continues to fall in 0.1% increments M/M, and if recessionary predictions play out as expected, then the FED could potentially hit its 2% Y/Y target as soon as May. An important thing to note is that this was the last CPI print that will be calculated based on the current methodology that considers two years of data. February’s data will be calculated on a single year of data meaning that future 2023 CPI prints will be based on consumption in 2021 alone. Considering 2021 data instead of 2020 and 2021 will likely bring the upcoming CPI numbers down leading analysts to believe that the FED is indeed engineering a pivot.
One event that could temporarily put a halt to the rally is that Genesis, the parent company of Grayscale, is said to be planning to apply for chapter 11 bankruptcy as soon as this week. It’s worth noting that the discount on $GBTC has widened to -43% over recent days after it had climbed back up to -36.5% following the December lows. Many analysts feel that the market already has this event priced in, however, it is certainly something to keep an eye on.
From a technical perspective, Bitcoin broke out from the falling wedge pattern and ripped above $20,000. Bulls will be hoping for a weekly close above the $21,000 resistance which would light the way towards $28,700 which is the prior head and shoulders neckline and 61.8% Fibonacci retracement level of the $3,782 2020 low to $69,000 2021 high. Bears will support the prediction of Elliot Wave theory that the observed rally is part of a Wave 4 correction. This means the market could potentially still have a Wave 5 selloff to come which would test the lows. The above Bitcoin weekly chart shows that the bullish momentum the market is experiencing in 2023 lies within the boundaries of Wave 4 meaning that the market may not be not out of the woods yet.
An important event to watch in the coming weeks is the FOMC meeting on the 1st of February. Following this meeting, the FED will release projections for the Federal Funds Rate in the coming quarters which will have a significant bearing on the short-run market direction. Volatility will be high around this time and caution should be exercised when entering positions.
Correlation – Crude Oil & CPIStudies indicated Crude Oil is the best indicator to track the current inflation.
It is also a leading indicator to inflation numbers? If that is true, we will have to track the crude oil prices very closely.
Content:
i. The most inline commodity with CPI
ii. Can the Crude Oil track CPI?
iii. Direction of Crude Oil
Crude Oil Futures
Minimum fluctuation
0.01 = $10
0.10 = $100
1.00 = $1,000
10.00 = $10,000
Disclaimer:
• What presented here is not a recommendation, please consult your licensed broker.
• Our mission is to create lateral thinking skills for every investor and trader, knowing when to take a calculated risk with market uncertainty and a bolder risk when opportunity arises.
CME Real-time Market Data help identify trading set-ups in real-time and express my market views. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com
Cable Pushing Higher After UK CPI Data Cable is back in an uptrend after a capitulation back in September, with the current price making some extended move up after breaking above 1.2 psychological level. We see Cable unfolding a five-wave bullish impulse from the lows, with more upside coming after recent pullback from the highs that unfolded as a correction. Ideally, that was subwave four that can not send the price back into an uptrend after a break above 1.2150 resistance. Ideally thats now the beginning of a new fifth wave higher. Some spectators are also betting on GBP as they believe BoE should be more hawkish with CPI at 10.5%.
Putting All Your Eggs in One BasketCME: Pork Cutout ( CME:PRK1! ), CBOT: Corn ( CBOT:ZC1! ), Soybean Meal ( CBOT:ZM1! )
Diversification is a fundamental concept in investing. In order to minimize the chances that market volatility wipes out your entire net worth, it is important to put your money in several investments with different levels of risk and potential return. This is summarized nicely in a single phrase – “Don’t put all your eggs in one basket”.
In 2022, however, if you have followed this time-honored advice and allocated your money carefully across major assets, you would have lost money! Why did diversification fail this time? Let’s look at the annual return by major investment category:
• Stock Market: S&P 500, -13.9%, Nasdaq 100, -25.5%
• Bond Market: 2-Year T-Notes, +6.7%, 10-Year T Notes: -10.6%
• Precious Metals: Gold, -6.9%, Silver, +8.8%
• Currencies: US dollar index, +6.7%, Euro, -4.1%, British Pound: -9.9%
• Energy: WTI crude oil, +1.2%, Henry Hub natural gas, -12.7%
• Agricultural Commodities: Wheat, -1.9%, Corn, +11.3%
• Cryptocurrencies: Bitcoin, -53.3%, ETH, -55.4%
A diversified portfolio is not necessarily low risk. In time of distress, assets thought to have low correlation could all move in the same direction – going down. Last year, geopolitical crisis, high inflation and central bank tightening took turns driving financial markets lower.
When a major crisis breaks out, all correlation goes to 1. This happened in 1998, when the Russian debt default took down Long Term Capital Management (LTCM), the largest hedge fund in the world. It repeated in 2007 and 2008, when the subprime crisis bankrupted Bear Stern and Lehman Brothers, the mighty Wall Street investment banks. It also wiped out the entire asset class in credit default swaps and exotic mortgage-backed securities.
In this past year, troubles in one crypto Exchange, FTX, drove all cryptocurrencies down. Bitcoin, Ethereum and stablecoins all lost value by half, even though the decentralized nature of the crypto market design is supposed to prevent this from happening.
The Soaring Egg Price
Ironically, if you put all your eggs in one basket, figurately, your investment would have doubled! According to price data reported by the Bureau of Labor Statistics, Large Shell Eggs, Grade A, have average retail price at $4.25 per dozen across US cities at the end of December, up 112% for the year.
A portfolio of shell eggs beats the return of all 15 assets listed above, by a wide margin! A new term, Eggflation , has been invented to capture this phenomenon.
Americans in recent years have increased egg consumption while reducing intake of red meat in their diet, according to data from the U.S. Department of Agriculture.
Interesting statistics : the total flock of egg-laying hens in the U.S. is around 320 million, almost matching the population of people. Each grown hen could lay as many as 320 eggs a year. And each of us eats about as many eggs as one hen can lay in a year.
Egg consumption has grown in part because more families are eating them as their main protein diet. As demand for eggs has risen, chicken production in the U.S. has slumped as we are currently experiencing the most severe avian (bird) flu epidemic in the US history. Nearly 58 million chickens have been infected with bird flu as of January 6th, according to the USDA. Infected birds must be slaughtered, causing egg supplies to fall and egg prices to surge.
So far, the total flock of egg-laying hens is down about 5% from its normal size, as farmers work hard to replace their flocks as soon as they can after an outbreak. On average, new-birth chicks take four months to grow into egg-laying hens. Egg prices are not likely to fall in coming months until decease-free hens are fully grown.
While US CPI has cooled to 6.5% in December, inflation for food items is much higher at 10.4%. Eggs are just one of many food staples that skyrocketed in price in 2022. Margarine costs in December surged 44% from a year ago, while butter rose 31%, according to the CPI data.
Egg Futures Contracts in the US and in China
CME Group, the world’s largest Derivatives Exchange, traced its root to the Chicago Butter and Egg Board founded in 1898. Standardized egg futures contract started trading in 1919, as the Exchange reorganized as Chicago Mercantile Exchange. CME egg futures were actively traded for sixty years. As the egg industry consolidated and egg prices stabilized over the years, the contract was delisted in 1982.
In November 2013, China’s Dalian Commodity Exchange launched its own Egg Futures. The contract is based on 5 metric tons of shell eggs. As a consultant, I assisted DCE in contract launch as well as ongoing support. On January 13th, daily trading volume of DCE egg futures was 98,893 lots, with open interest standing at 204,202 contracts.
A Case for Intermarket Spread
The huge surge in egg prices amplifies the market risks for egg industry. Without the price discovery function at the futures market, farmers would have a hard time projecting future price trend. They rely on cash market prices to make production decisions.
It takes four months to grow chicks into egg-laying age. Each commercially-raised hen will lay eggs for 1-1/2 years before being slaughtered. For each flock, farmers face price risks for up to two years. The main feed ingredients, corn and soybean meal, could be hedged with CBOT futures contracts. But egg and chicken prices are exposed naked.
Farmers are rapidly expanding their flocks as egg price skyrocketed. At some point, there will be too many chickens in the henhouse, causing egg price to crash.
Maybe an egg futures contract could make a big difference. I think it is time to bring back the CME egg futures.
Until then, you could consider intermarket spread if you want to participate in the market:
Buy Pork Cutout (PRK) and Sell Corn (ZC) and Soybean Meal (ZM) futures. August PRK rose 14% from October and currently prices at 30% above the front February contract.
• Like Hog Margins, this intermarket spread attempts to capture the profit margins in egg production. This is based on projected up trend in both pork and egg prices.
A second intermarket spread is to Buy DCE Egg Futures (JD) and Sell CBOT Corn (ZC) and Soybean Meal (ZM) futures, if you could trade the Chinese futures market.
Finally, you could buy shell eggs in cash market and store them in a cold storage. You would make money if future egg price surge could cover the storage cost.
Happy trading.
Disclaimers
*Trade ideas cited above are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management under the market scenarios being discussed. They shall not be construed as investment recommendations or advice. Nor are they used to promote any specific products, or services.
CME Real-time Market Data help identify trade set-ups and express my market views. If you have futures in your trading portfolio, check out on CME Group data plans in TradingView that suit your trading needs www.tradingview.com
FX + ECONOMY | EVENT - WEEKLY PREVIEW | KW03 |In today's article, we will go into all the important events,
which are scheduled in the economic calendar, for the next week.
> Calendar week | 03 - - - 16. January 2023 – 20. January 2023
Let's briefly discuss what the listed events mean for your personal trading.
> When you want to trade a currency pair, you should always be careful that you do not accidentally get into an "event".
> These events can end in random volatility, which technical analysis does not respect, and therefore a possible loss.
> A strategy of "Market-Makers" is to liquidate both sides (short | long) to the event and then continue the participated direction.
MONDAY
> CAD | 10:30 p.m. | BOC = Business Outlook Survey
TUESDAY
> GBP | 02:00 a.m. | Employment change + unemployment rate
> EUR | 05:00 a.m. | GER Harmonized Index of Consumer Prices
> CAD | 08:30 a.m. | CPI = Consumer Price Index
> USD | 08:30 a.m. | Change in manufacturing index
WEDNESDAY
> GBP | 02:00 a.m. | CPI = Consumer Price Index
> USD | 08:30 a.m. | Retail Sales
> AUD | 07:30 p.m. | Employment change + unemployment rate
THURSDAY
> Nothing to relevant
FRIDAY
> CAD | 08:30 a.m. | Retail sales
Wednesday will be among certainly the most volatile, with the release of the American "retail sales", at 08:30.
MARKET INFLUENCE
Each of these dates, leads in the respective currency pair, to high / moderate volatility.
> Events that make the overall market volatile are mostly related to the USD.
= This is due to the fact that the USD has a position as an indirect world currency through global acceptance and thus has significant influence on the other currency pairs / economy.
To use an example to explain the influence of the USD on other currency pairs, let's look at the DXY (USD index).
The DXY is composed of the pairs:
EUR (57.6%), JPY (13.6%), GBP (11.9%), CAD (9.1%), SEC (4.2%) + CHF (3.6%)
When a positive metric is published for the USD = its value rises.
= The pressure on the currencies in the DXY basket increases.
= Thus they are "negatively" valued by traders.
= Sell-off
In summary, the higher the country's opinion on the global economy, the greater impact it takes on the overall market.
> Feel free to share in the comments, about the impact of this week's appointments.
> Sharing your perspective allows each of us to improve.
If this explanation has added value to you, I would be very happy to receive a rating.
Thank you and happy trading!
ZIEL IST DIE AUTARKIE | THE GOAL IS SELF-SUFFICIENCY
USOIL | DECRYPTERS | US OILHi people Welcome to our OIL Analysis
We put Our Technical and Fundamental Analysis together So both can be Combined
1- My Political Aspect is FED wanted to show people that their polices are working the oil prices will move inflation again.
2- Strength of USD was keeping US inflation low relative to Other countries ,but if USD get deep dive more it'll also fuel the inflation.
3- If US make USD more strong they can buy oil at cheaper prices i Really think it will go for that , Four our Technical point of view look our Dxy Analysis.
Morning Update- The Yens For The WinI don't have much to say about this week's trading except, glad it went the way it did and CPI data helped price move this week.
I took advantage of a few Japanese Yen trades. My hopes is that you did too. In my humble opinion, they moved better to me than most currency pairs did.
So, yay! It's the Yen's for the win!
Now to update.
Most Yen pairs made new lows. This is the best time to update your charts to find an opportunity to possible sell again, if your strategy meshes with the recent movement of course.
I'd love to see fullbacks via the daily timeframe before I enter another longterm swing again, but thats just me.
Be well. Happy Friday. Enjoy your weekend.
I'll see you all Sunday night at 8:00 pm EST. for another live stream.
-Shaquan
CPI & Inflation Rate USHello everyone! Let's take a look on what happened yesterday on the US financial market and understand the impact of CPI and inflation rate.
The Consumer Price Index (CPI) and inflation news from the United States can have a significant impact on financial markets and the value of the U.S. dollar. The CPI measures the change in the price of a basket of goods and services consumed by households, and inflation is the rate at which the general level of prices for goods and services is rising.
When the CPI and inflation numbers are higher than expected , it can indicate that the economy is growing, which can boost stock prices, lead to higher interest rates, and appreciate the dollar. This is because as the economy grows, companies will see increased demand for their products and services, which can lead to higher profits and stock prices. Higher interest rates can also attract more investors to bonds, which can lead to higher bond prices. Additionally, a strong economy can lead to increased demand for U.S. goods and services, and increased foreign investment in the U.S. economy. As a result, the demand for dollars increases, which can lead to an increase in the value of the dollar.
On the other hand, if the CPI and inflation numbers are lower than expected , it can indicate that the economy is slowing down , which can lead to lower stock prices, lower interest rates and depreciation of the dollar. This is because as the economy slows down, companies will see decreased demand for their products and services, which can lead to lower profits and stock prices. Lower interest rates can also lead to less investors in bonds, which can lead to lower bond prices. Additionally, a weak economy can lead to decreased demand for U.S. goods and services, and decreased foreign investment in the U.S. economy. As a result, the demand for dollars decreases, which can lead to a decrease in the value of the dollar.
It's important to note that the Federal Reserve uses inflation as an indicator to change the monetary policy, as they use interest rates as a tool to control inflation. Typically if inflation is too high, the Fed will increase interest rates to slow down the economy and curb inflation, and if inflation is too low, the Fed will decrease interest rates to stimulate the economy. These monetary policy decisions can also have an impact on the value of the dollar, as when the Fed raises interest rates, it can make the U.S. a more attractive place to invest, which can lead to an appreciation of the dollar. Conversely, when the Fed lowers interest rates, it can make the U.S. a less attractive place to invest, which can lead to a depreciation of the dollar.
A Grim Picture of InflationFed Funds Futures (ZQ) CBOT:ZQ1! , 2-Yr Yield (2YY) CBOT_MINI:2YY1! , 10-Yr Yield (10Y) CBOT_MINI:10Y1!
This is the third report in the series “Year of the Rabbit: Short-tailed Trading”.
US Consumer Price Index (CPI) declined 0.1% in December 2022 on a seasonally adjusted basis, after increasing 0.1% in November, the U.S. Bureau of Labor Statistics reported on Thursday, January 12th. Over the last 12 months, the headline CPI increased 6.5%. The inflation index for all items less food and energy rose 0.3% in December, after rising 0.2% in November. The Core CPI increased 5.7% year-over-year.
December is the only month in 2022 when aggregate price falls below prior-month level. The headline CPI is now 0.5% lower than a year ago on an annualized basis.
Cooling inflation is welcoming news to consumers, businesses, and investors. It also gives the US Federal Reserve more flexibility to moderate its hawkish monetary policy.
Inflation by Category Data Paints a Different Picture
The December CPI data was a “one-man show”. Gasoline price declined 9.4% in one month, bringing its annual change to -1.5%. After an all-time high record of $5/gallon reached in June, we ended 2022 with lower gasoline price year-over-year.
If you think we are getting relief in energy cost, nothing could be further from the truth.
• Fuel oil dropped 16.6% in December, but it is up 41.5% for the year
• Electricity price went up 1% in December and +14.3% for the year
• Pipelined natural gas were up 3% monthly and +19.3% yearly
Americans are getting bigger utility bills to light up the room and heat the house this winter.
Other essential items:
• Food cost +0.3% in December and +10.4% Y/Y in 2022
• Shelter cost +0.8% monthly and +7.5% annually
• New cars cost 5.9% more but used cars are 8.8% cheaper in 2022
Inflation is certainly on the way down, but it is sticky. Many product and service items essential to household living and business operation are far from under control.
Interest Rate Outlook for 2023
After the release of new CPI data, market consensus centers on a modest 25-basis-point increase on February 1st., which would bring the Fed Funds rate up to 4.50-4.75%. I also expect another 25-bp raise on March 22nd, setting the so-called terminal rate at 4.75-5.00% for the rest of 2023. This is my baseline forecast for 2023.
The previous section shows that inflation is still uncomfortably high for food, housing, and energy to power the home, as well as for new vehicle. The Fed’s job for fighting inflation is far from over. I do not expect any rate cuts to occur in foreseeable future.
When it comes to central bank monetary policy, there is a lagging period before it works its way through the economy. The response lag could be anywhere from 6 to 12 months. By my estimate, it takes about 7 months in this rate-hike cycle.
The Fed initiated the first increase in March, but inflation did not peak until June at 9.1%. Monthly CPI was unchanged the following month. However, the slowdown was solely due to a sharp decline in gasoline price, not attributable to the Fed.
Core CPI topped 6.6% in September, then subsequently moved lower to 6.3%, 6.0% and 5.7% in the fourth quarter. October was the first month when core inflation reverses its rising path. This is where I mark the start of inflation response to monetary tightening.
Once the Fed reaches its terminal rate, the force of inertia would carry the policy impact on inflation for several more months. That’s why the Fed is likely to keep the rate unchanged for the remainder of 2023, measuring the policy effect.
Fixed Income Investment Opportunities
On “The Real Cost of Fed Rate Hikes”, published on July 25th, I spelled out the impact of interest rate increases to households, corporations, Federal and local governments.
With the risk-free rate expected to reach 5%, all borrowing cost will go up further, even after they rose significantly last year. As the economy slows down, those with high debt loads may not make it through this downturn.
If you plan on investing in bonds, default risk should be on the very top of your mind. Consider safe play: Avoid any issuer with a high debt-to-equity ratio. Corporate high-yield, municipal bonds, and securities backed by adjustable-rate mortgages and credit card balance fit this bill.
JPMorgan Chase took notice. On Friday the 13th, JPM NYSE:JPM posted revenue that beat expectations, but the biggest US bank warned it was setting aside more money to cover credit losses because of a “mild recession” is its “central case.” The bank posted a $2.3 billion provision for credit losses in Q4, a 49% increase from the 3rd quarter.
For relatively safe investment options, bank certificates of deposits (Jumbo CD) and high-quality corporate bonds (rated A or above) offer yields from 4.50% to 6.0%. They could beat inflation in the coming years.
Spread Trade Opportunities
We have been in a negative yield-curve environment since July. In my opinion, slower rate hikes weaken the force that drives short-term yield rising faster than long-term ones. Once the Fed actions are over, mean reversion could occur so long as we do not fall into a deep recession.
A Refresher: Yield curve plots the interest rates on government bonds with different maturity dates, notably 3-month Treasury Bills, 2-year and 10-year Treasury Notes, 15-year and 30-year Treasury Bonds.
Bond investors expect to be paid more for locking up their money for a long stretch, so interest rates on long-term debt are normally higher than those on short-term. Plotted out on a chart, the various yields for bonds create an upward sloping line.
Sometimes short-term rates rise above long-term ones. That negative relationship is called yield curve inversion. An inversion has preceded every U.S. recession for the past half century, so it’s seen as a leading indicator of economic downturn.
On January 12th, 2-year T-note is quoted at 4.20% in cash market, while the 10-year T-note is priced at 3.61%. This measures the 10Y-2Y yield spread at 59 basis points.
The negative yield curve could become less inverted, then change to a flat yield curve in the coming months. It could reverse back to an upward sloping normal yield curve in 2024. Here are my reasoning:
• Easy money created by record government spending kept the borrowing cost low. This was a main reason why longer-term yields rise less than short-term ones.
• The new Republican-controlled Congress would stall the approval of big-ticket expenditure bills. Closing the flood gate could bring the borrowing cost back up.
• After the depletion of low-cost capital, lenders will have no choice but to raise the long-term lending rate above the short-term deposit rate.
CBOT Micro Yield Futures offer a way to express your view on future yield direction. You could also observe how the expected yield spread changes between 10Y and 2Y.
On January 12th, February Micro 10Y Yield Futures (10YG3) was settled at 3.446. February Micro 2Y Yield Futures (2YYG3) was settled at 4.081. The 10Y-2Y spread is -63.5 basis points.
Micro Yield Futures are notional at 1,000 index point, with each point equal to 1/10 of 1 basis point and value at $1. For example, if the 10Y-2Y spread narrows to -40 basis points, your position would gain $235 (= (-40+63.5) x 10) if you long the spread.
To trade Micro Yield futures, margins are $375 for 10Y and 2YY. A long spread can be constructed by a Long 10Y and a Short 2YY positions.
Happy trading.
Disclaimers
*Trade ideas cited above are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management under the market scenarios being discussed. They shall not be construed as investment recommendations or advice. Nor are they used to promote any specific products, or services.
CME Real-time Market Data help identify trade set-ups and express my market views. If you have futures in your trading portfolio, check out on CME Group data plans in TradingView that suit your trading needs www.tradingview.com
INFLATION RATE AND BTC MOONHello Traders
As you know, the inflation rate decreased to 6% in the past day, this news created a significant bullish movement for Bitcoin Price, but don't get FOMO, Yet. As you can see Bitcoin's overall Technical shows that, the price is still in a bearish phase in the bigger picture, and is currently on an excellent resistance level, both Dynamic and static.
On the Onchan side, I screenshotted a metric called Net realized Profit/Loss, Net Realized Profit/Loss is the net profit or loss of all moved coins, the value shows that the whole network was moving their bitcoins in profits today, which can cause a reversal in the bullish trend.
Overall I can see a Correction or consolidation for bitcoin before the bullish phase.
Note that this is an Intraday analysis and is only valid for a couple of days or even hours.
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What is your opinion? Comment below.
If you like the idea, please hit the boost button and follow me so you will get the updates. The information given is never financial advice. Always do your research too.
Good luck.
GBPUSD after CPIYesterday we saw big swings during the news. In GBPUSD we saw a pullback off the support zone and a new high.
It’s crucial now to see if this movement has the strength to continue.
We’re looking at a new support zone that in the near hours we expect a reaction from.
Upon another rise the goal will be 1,2315.
The scenario fails on a breakout of 1,2087.