10Y: Inflation Could Creep Back Up as Seaborne Trade InterruptedCBOT: Micro 10-Year Yield Futures ( CBOT_MINI:10Y1! )
Maritime transport is the backbone of international trade and the global economy. Over 80% of the global trade volume in goods is carried by sea, according to the UN. Therefore, whenever a major trade route is blocked, shipping time would be lengthened, which pushes up freight cost, and ultimately, the prices of merchandise.
Suez Canal Blockage, March 2021
Traffic jams at sea are not rare. On March 23rd, 2021, a 400-metre-long container vessel, MV Ever Given, got diagonally stuck inside Egypt’s Suez Canal. Transport was completely blocked in the all-important 193-km narrow waterway for six days.
Suez Canal is one of the world's busiest shipping channels for oil, refined fuels, grain, and other trades linking East to West. It moves about 12% of the global trade. Holding up traffic there could cost $9 billion per day, according to data from Lloyd’s list.
Direct impact: The Baltic Dry Index (BDI), a benchmark for the cost of shipping goods worldwide, traded around 2350 before the blockage. It shot up to 3170 (+35%) by May and peaked at 5530 (+135%) by October. While canal blockage was not the only cause, it exposed weaknesses in global trade and triggered a chain reaction in price hikes.
Influence: In February 2021, US CPI was well under control at a 1.7% annual rate. It jumped to 2.6% in March. By the time BDI peaked, CPI was at 6.2% in October. But it did not stop there, US CPI topped 9.1% in June 2022, 15 months after the blockage.
Panama Canal Drought, August 2023 to Present
The 65-kilometer-long Panama Canal connects the Atlantic and Pacific Oceans and is a key shipping hub for trade between North and South America to Asia and Europe. It links about 5% of global trade. In 2022, more than 14,000 ships passed through the canal.
The Panama Canal is experiencing a severe drought now, resulting in a shortage of fresh water for the operation of the locks. This forced officials to slash the number of vessels they allow through and has created expensive headaches for shipping companies. Before the crisis, 38 ships a day moved through the canal. It’s now down to only 22.
Canal authority now hosts special auctions to allow winner to cut in line and move his ship ahead in the queue. It is reported that shipping companies paid up to $2 million for this privilege, which is on top of the regular canal fees they paid.
Direct impact: Unlike the Suez fiasco, drought would last for months. It’s estimated that daily passage could move up to 24 by January 2024. The canal would still be running at 65% capacity. This means that global trade could be slowed by as much as 2%.
Red Sea Under Houthi Attacks, October 2023 to Present
The Bab el-Mandeb Strait is between the Horn of Africa and the Middle East. It connects the Red Sea to the Gulf of Aden and the Arabian Sea. This waterway is used by container ships and exports of petroleum and natural gas from the Persian Gulf. Approximately 12% of the world’s trade, which includes 30% of all global containers, move through the Suez Canal. That then feeds through the Red Sea and Bab el-Mandeb.
The Yemen-based Houthi militants have threatened to attack any vessels that have ownership ties to Israel or do business there. Overall, 13 vessels have been attacked at Red Sea since the Israel-Hamas conflict broke out in early October.
On Saturday, MSC, the world’s largest shipping carrier, said that its ships will not transit the Suez Canal due to security risks. Shipping giants Hapag-Lloyd and Maersk also paused travel through the Red Sea a day earlier.
Direct impact: The collective vessel market share of MSC, Hapag Lloyd, and Maersk is approximately 40% of global trade. The decrease in vessel transits by these three giant ocean carriers will be a financial hit to Egypt, which owns, operates, and maintains the Suez Canal. Egypt has already seen a hit in tourism due to the conflict.
Impacts from Panama Canal and Red Sea Crisis
The combined trade volume passing through Suez and Panama canals accounts for 17% of global trade. Any interruption, either man-made or by nature force, could reduce global goods supply and add to the price tag on store shelves.
The long wait time at the canal and the extra weeks it takes for using alternative route both increase overall fuel consumption and other expenses. Even though crude oil price has been falling, freight shipping cost are now on the way up. This is like a tax on the economy. The impact on such a global scale could reverse the trend of cooling inflation.
If recent history repeats itself, we could see US CPI creeping back up in the coming months, following a surge in the BDI.
Trading Opportunity with CBOT Micro Yield Futures
Last Wednesday, the Federal Reserve decided to keep the Fed Funds rate unchanged in the 5.25-5.50% range. While Fed officials put out inconsistent statements about what they would do next, investors overwhelmingly concluded that rate cuts are coming soon.
On Thursday, both S&P and Nasdaq made 52-week high, of 4,738.57 and 14,855.62, respectively. The Dow reached a new all-time-high record of 37,347.60 on Friday.
According to CME FedWatch Tool, the first rate-cut could occur in March, with a 69% probability. By the end of 2024, there is a 98% probability that the Fed Funds rate would be 4.25-4.50% or lower, indicating investor expectations of 4-7 cuts of 25 bps each.
(Link: www.cmegroup.com)
In the Treasury spot market, 10-Year yield was quoted 3.928% on Friday. This represents 132 bps below Fed Funds, and a 10Y-2Y spread at -51 bps. In the futures market, CBOT Micro Yield futures ($10Y) January 2024 contract (10YF4) was settled at 3.927 last Friday, in line with the spot market.
If our analysis on pending inflation rebound is proven to be correct, the Fed would start cutting rates later than the market expected, and not as much as the Treasury market priced in at the moment.
Each Micro 10Y Yield contract has a notional value of 1,000 index points, or $3,927 at current price. To acquire 1 contract, a trader is required to deposit an initial margin of $320.
If the resurgence of inflation spurred by global supply chain disruption makes the Fed to maintain its hawkish stance and continue tighten the monetary policy, the rates will stay elevated. A trader with a long position will gain if 10Y yield rises.
While a rate hike raises Treasury yield, the postponement of an expected rate cut also has similar effect. The forecasted low yield would now be revised up. As a result, the futures price, which is the 10Y yield, would go up, rendering a profit for the long position.
On the other hand, if 10Y yield continues to fall, the trader would incur a loss of $250 for each 25bps cut.
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 trading set-ups 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
Fedpivot
Fed Pause is the New Restricted PolicyCME: Micro Russell 2000 ( CME_MINI:M2K1! )
Global financial market orbits around Federal Reserve’s interest rate decisions. By concept, hiking interest rates means monetary tightening while cutting them signals easing. In reality, market perception to the Fed actions evolves over time, sometimes blurring the difference between “good news” and “bad news”.
• On May 5, 2022, the Fed surprised the market with a larger-than-expected 50-bps rate hike. The S&P 500 fell 3.6%. This is a normal market reaction to bad news.
• On July 27, 2022, the Fed hiked 75 bps and the S&P soared 2.6%! Previous meetings saw the Fed raising the stake from 25 to 50 and then 75 bps. By not getting a bigger 100-bp hike, investors were relieved and cheered as if it were good news.
• On February 1st, the Fed raised for the 8th time, but the S&P went up 1%. With lower-than expected inflation, investors concluded that this would be “the last” rate hike.
• On September 20th, the Fed paused after raising for 11 consecutive times. The S&P were down 1% as investors were spooked by the hawkish Fed statement.
Last Friday, the Bureau of Economic Analysis (BEA) reported that personal consumption expenditures price index (PIC) excluding food and energy increased 0.1% for August, lower than expectation. On a 12-month basis, the index was up 3.9%.
As the Fed’s favorite inflation gauge shows that the fight against higher prices is making progress, “Fed Pause” might be the new baseline case for the US central bank’s interest rate decision.
The futures market agrees. CME FedWatch Tool shows that the probability of the Fed keeping rate at 5.25-5.50% is high through Mid-2024. Specifically:
(Link: www.cmegroup.com)
• Fed pause on November 1st, 2023 FOMC meeting: an 82% probability
• Fed pause on December 13th, 2023: at 65%
• Fed pause on January 31st, 2024: at 65%
• Fed pause on March 20th, 2024: at 60%
• Fed pause on May 1st, 2024: at 49%
Last year, a Fed Pause meant slowing the rate hikes. It has a very different meaning now: to keep the interest rate higher for longer. Therefore, what was once a signal of easing should now be viewed as restricted monetary policy.
Even if the Fed stops raising rates, the cumulative effect of past rate hikes would continue to ripple through the US economy. Government policy has a lagging period, but it has passed. Households and businesses now feel the full force of higher borrowing costs. Below are two-year changes of selected interest rates from the FRED:
• 30-Year-Fixed Mortgage Rate: from 3.01% to 6.29% to 7.29%
• 72-Month New Car Loan: 4.17% - 5.19% - 7.80%
• Credit Card Interest Rate: 14.61% - 15.13% - 20.68%
• Baa Corporate Bond Yields: 3.26% - 5.97% - 6.39%
Restricted monetary policy would have negative impacts on stocks. Good news: Market prices show that investors have not yet adapted to changes in the Fed trajectory.
Russell 2000: The Weakest Link
The discounted cash flow (DCF) pricing theory states that stock price is the present value (PV) of expected future cash flows discounted by the weighted average cost of capital (WACC). A higher cost of capital shall cause stock price to fall, other things equal.
Small- and medium-sized companies would be hit harder comparing to larger corporations. As rates go up, credit standard will be tightened, and credit spread will expand. Below are current bond rates charged to companies with different credit scores:
• 10-Year Treasury Bond Yield: 4.58%
• Moody’s Aaa Corporate Bond Yield: 4.95%
• Moody’s Baa Corporate Bond Yield: 6.39%
• Bank of America BBB Corporate Bond Yield: 6.31%
• Bank of America BB High Yield: 7.55%
• Bank of America CCC or Lower High Yield: 14.05%
Russell 2000 is the benchmark stock market index for the US small companies. CME Micro Russell 2000 futures ( FWB:M2K ) has a drawdown of 200 points in the past two months, from yearly high of 2013 to 1807. The index is still up 2.6% YTD.
As the Fed keeps rates high for the next 6-9 months, corporate bond yields could likely go higher. And the credit spreads, including Baa-Bbb, Baa-Bb, and Baa-Ccc, would likely get wider. This could put further downward pressure on the Russell index.
Could we quantify the impact? Let’s illustrate this with a $1 million payment, to be received in five years.
• Applying the BBB corporate bond yield 6.31% as the WACC, present value of $1 million will be $736,427.
• If the WACC goes up by 200 bps, the PV will be reduced to $670,899.
• This shows that a 2% increase in WACC could cause an 8.9% loss in market value.
The same concept would work on the Russell index. WACC could go up, either due to a rise of general interest rate level, or because of the widening of credit spread. The result would be the decrease in the market value of Russell component companies.
For someone with a bearish view of the Russell 2000, he could establish a short position in Micro Russell futures. The contract has a notional value at $5 times the index. At Friday closing price of 1807, each December contract (M2KZ3) is worth $9,035. CME Group requires an initial margin of $620 for each M2K contract, long or short.
A short trader would gain $5 for each point the M2K moving down. Hypothetically, if the Russell is 5% lower, the 90-point slide would translate into $452 gain per contract. The risk of short futures is the index going up. If investors continue to perceive Fed Pause as “good news”, Russell could rise after the November and December FOMC meetings.
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 trading set-ups 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
Regional Banks on the Brink!Zoom in and you will see that Regional Banks have closed several times now below this critical trend line. If the Fed fails to save them, deflationary recession/depression it is. I am banking on a Fed save. The Fed always protects it's own. Therefore, blow-off top incoming. Followed by hyper-inflationary recession/depression next year.
Should be a show.
Stew
XRP 10X interesting take on history repeating. Previous cycle has been overlaid onto the most recent chart on daily timeframe. If we're entering a extended cycle we could see a further and continued break targeting ATH and above.
Second week December around 14th
Target $3- $4 for XRP ( 10-15x from lows 0.29c)
Fundamentals- SEC ruling news due around this period.
This trade idea is a bit of fun so don't pile everything into XRP.
Measured Move? Or More?Short the rallies! Every rally is nothing but liquidity grab. You gotta be nuts to go long here, because:
FOMC > more rate hikes 'may be needed' = 'are coming'
Banking crisis. Worse than they let on.
Yield curve inverted. Always preceeds major selloff.
Recession is coming. For all the above. We in 70's economy, stupid!
The Big Dump w/capitulation always comes near the Fed pivot. Next meeting may be the pivot.
Every Bear has finished with VIX >40. This will be no different. Buy when VIX pops and stonk drops.
Could get a measured move, could get a massive dump, I can't see the future, always guessing; GLTA!
BITCOIN Looking to close the Weekly above the 200 SMA!Bitcoin in the last week put in a massive move! More weighted towards the $ pumped into saving the failing banks....
Will the FED Pivot and stop Rate Hikes? This is gonna be the big QUESTION of the week come this Wed, be prepared for the decision... <---
This close today above the 200 SMA can be the catalyst to move BTC higher and head towards $48K - $50K... That's if BTC does bot dump down below $25k before the close of today...
Bitcoin always surprises you!
Its gonna be an interesting week...
Good Luck Out There!
When downside volatility becomes an advantage.It’s been a while since we looked at the Russell 2000. For the uninitiated, the Russell 2000 index is a small-cap stock market index that is made up of the smallest 2000 stocks in the Russell 3000 Index.
The small-cap nature means a few things, volatility tends to be higher for one. And capturing this downside volatility using the Russell 2000 as compared with the S&P 500 has almost always proven more fruitful.
When to take this trade you may ask? The recession bellwether indicator of the 2Y – 10Y yield spread is a simple place to start. With the benefit of hindsight, shorting each of the indexes at the peak ‘inversion’ points proves to be a decently successful strategy. Especially so using the Russell 2000.
So the next question to ask is if we are near the peak point of inversion?
To answer this, we have to circle back to research from last week, where we discussed the expected rate path for the Federal Reserve (Fed).
In short, markets seem to be pricing in a Fed pause, followed by a pivot in the coming year. Looking back at the charts, this shift in stance (or pause) highlighted in the top chart generally marks the turning points for the 2y-10y yield curve inversion, highlighted in the bottom chart. Therefore, with markets expecting a pause as early as the first quarter, we suspect that the turning point for the yield curve inversion is just around the corner.
On price action, the 1900 level proves to be of significant resistance, with multiple attempts to break through being rejected. As prices creep towards this resistance level once again, we think this might just provide another attractive opportunity for trading.
Zooming out to a daily timeframe, the 0.382 Fibonacci levels marked by the previous high and low, also coincide close to the resistance levels on the shorter timeframe.
The proven downside volatility, along with the coming turning point in the yield curve inversion, keeps us bearish on the Russell 2000. Additionally, the price action points to significant resistance overhead, around the 1900 level. Setting our stop at 2035 level (one Average True Range away & close to the next resistance level) and take the profit level at 1690, with each 1-point increment in the Russell 2000 futures contract equal to 50$.
The charts above were generated using CME’s Real-Time data available on TradingView. Inspirante Trading Solutions is subscribed to both TradingView Premium and CME Real-time Market Data which allows us to identify trading set-ups in real-time and express our market opinions. 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
Disclaimer:
The contents in this Idea are intended for information purpose only and do not constitute investment recommendation or advice. Nor are they used to promote any specific products or services. They serve as an integral part of a case study to demonstrate fundamental concepts in risk management under given market scenarios. A full version of the disclaimer is available in our profile description.
Where is the EURUSD headed amid the EU and US inflation lag?We hope everyone had a great start to the year! As we think about the year ahead and some of the major themes that might play out, the EU vs US inflation story is among those catching our eyes now in particular.
“Inflation” & “Rate Hikes” were the main talking points for the US Economy in 2022 as the US Federal Reserve (Fed) reacted and adjusted to stubborn inflation. On the other side of the Atlantic, a similar situation is playing out, albeit with a 4 to 7 months lag behind the US.
Measuring the difference between the turning points, we can roughly determine the lag between the economic indicators. Headline Inflation (top chart) in the US moved up close to 7 months before the EU’s. Core Inflation (middle chart) in the EU lags the US by 5 months. Policy reaction (bottom chart) of the European Central Bank (ECB) lags the Fed by 4 months.
This dynamic is important when trying to understand the path forward for the EURUSD currency pair as central banks watch inflation figures and adjust policy rates accordingly.
EU & US policy rate differentials help us sniff out major turning points for the EURUSD pair. As seen in the chart above, the yield differential measured using CME Eurodollar and Euribor futures, started to widen in September 2021, which marked the EURUSD tumble from 1.160 all the way to 0.987.
But now it appears the reverse is happening. Yield differentials are starting to close as markets adjust to slower pace of rate hike environment in the US while ECB still battles stubbornly high inflation. Using CME’s Fed watch tool as well as Bloomberg’s OIS Implied Euro interest rate probability tool, we can estimate the market implied forward path for the 2 major central bank’s policy rates. With the market expecting the Fed to pause rate hikes in March, while the ECB is expected to only pause in July. Interestingly, the difference in expected rate pivot is in line with the 4 to 7 months lag in economic conditions we established from the analysis above. As the ECB continues to hike while the Fed pauses, yield differential is likely to close, helping to boost Euro’s attractiveness against the USD.
Coupled with the dollar’s downward momentum, This could favor further strength in the EURUSD pair.
On the technical front, we see a golden cross with 50-day moving average crossing above the 200-day moving average for the pair. Coupled with an uptrend and spike in the RSI, it has marked the recent up trends remarkably well. If this historical behavior holds, the EURUSD pair could still have further room to run.
For those who use Parabolic SAR, the current chart has just flipped back to a buy signal after the recent price consolidation.
Given the ECB’s policy lag, dollar weakness, and a bullish technical setup, we lean on the buy side for the EURUSD pair. We set our stop at the 1.0520 level, and take profit level at 1.12800, with each 0.00005 increments per EUR in the EURUSD futures contract equal to 6.25$.
Do also check out our previous EURUSD idea which played out nicely:
The charts above were generated using CME’s Real-Time data available on TradingView. Inspirante Trading Solutions is subscribed to both TradingView Premium and CME Real-time Market Data which allows us to identify trading set-ups in real-time and express our market opinions. 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
Disclaimer:
The contents in this Idea are intended for information purpose only and do not constitute investment recommendation or advice. Nor are they used to promote any specific products or services. They serve as an integral part of a case study to demonstrate fundamental concepts in risk management under given market scenarios. A full version of the disclaimer is available in our profile description.
Sources:
www.cmegroup.com
www.cmegroup.com
Bloomberg
✅WHAT TO EXPECT IN 2023❓
✅2022 was a difficult year but it has almost ended, so it is natural for us to ask what has 2023 in stock for us! The answer lays in the structure that we both love and hate and it's the FED. Yes, the markets are now governed not by fundamentals and value but by the decision of a bunch of people in suits at the FED. However, we are traders and our job is not to lament the current state of affairs but to make money off of it! But how?
Well, according to my analysis, the FED will pivit in the first half of 2023 . After that, the only direction the markets will know is UP! Everything from Gold to Stocks to Crypto will start it's upward journey creating another bubble bigger and more dangerous than the previous one. And while all the sensible people know that this is unsustainable and that this house of cards will one day collapse on our heads, we should remember one of the most profound proverbs of the financial world: The markets can remain irrational longer than you can remain solvent! So let's use the irrationality and the exuberance of the current system to fill up our coffers while we can.
After the FED pivots I will start slowly buying assets and I recommend you to do follow my lead!
Happy New Year to you and your families!
Inflation Slowing, but Still a Concern for the Federal ReserveInflation in the United States, as measured by the consumer price index (CPI), is expected to have slowed again in November. This is due in part to a weaker economy, which has reduced inflation pressures. However, the expected 0.3% increase in the CPI is not enough to ease concerns at the Federal Reserve or prevent the central bank from raising interest rates even higher to slow the economy.
Gas prices have fallen since the summer, reversing the spike in spring that sent inflation to a 40-year high. As a result, the cost of living has risen more slowly in the past four months. If the forecast is accurate, the annual rate of inflation would taper off to 7.3% from 7.7% in October and a peak of 9.1% in June.
The core rate of inflation, which excludes food and gas, is also forecast to rise 0.3% in November. This is still higher than the monthly gains that were the norm before the pandemic. The yearly rate of core inflation may fall slightly to 6.1% from 6.3% in the previous month. The rate peaked at 6.6% in November.
The increase in the cost of goods, excluding energy, has relaxed to 5% in October from 12.4% in February. However, the increase in the price of services continues to accelerate. The cost of services, excluding energy, has risen 6.8% in the past year. This is due in part to the increasing cost of labor, which is the biggest expense for most service-oriented businesses.
Rents have jumped 7.5% in the past year, marking the biggest surge since 1982. Rents are starting to decrease as the economy slows, but the Fed and Wall Street are watching for clear evidence of a reversal. Even if rents and home prices level off, the change may not immediately show up in the CPI report.
Buy These Stocks If The FED Pivots... NOT the S&P 500Investing in the S&P 500 index is not always the best way to profit from an anticipated Federal Reserve pivot towards lower interest rates. While U.S. equities may rally when the Fed reduces the pace of its rate hikes, international equities are likely to be an even better performer for dollar-based investors. This is because the U.S. dollar's strength against other currencies is likely to weaken after a Fed pivot, and if this happens, an investment in non-U.S. stocks will earn a double return from the stocks themselves and from the appreciation of those stocks' local currencies. The double-return potential of international equities has been illustrated in recent months, with the U.S. dollar index falling 8.3% between September 28 and December 5, and the MSCI's ACWI-ex-U.S. index beating the S&P 500 by 6.4 percentage points.
The potential outperformance of international equities over the S&P 500 in the event of a Federal Reserve pivot towards lower interest rates can be attributed to the likely weakening of the U.S. dollar's strength against other currencies. This is because, as the Fed eases, it could weaken the dollar, which would be favorable for non-U.S. markets and dollar-based investors.
The past few months provide a good example of the double-return potential of international equities. Since reaching its high on September 28, the U.S. dollar index has fallen by 8.3% through December 5. During this same period, the MSCI's ACWI-ex-U.S. index, which reflects the return of an index of non-U.S. stocks, has outperformed the S&P 500 by 6.4 percentage points, with a return of 14.2% compared to 7.8% for the S&P 500.
It is worth noting that the fate of the dollar on foreign exchange markets depends on factors beyond the timing of the Fed's pivot. It also depends on the actions of the central banks of the United States' major trading partners. However, it is likely that the Fed will pivot before these other central banks, as they were slower to recognize the persistence of inflation. For example, European central banks were even slower to recognize inflation than the Fed, and as a result, eurozone inflation is currently higher than U.S. inflation.
In light of these factors, investors may want to consider shifting their equity portfolio's asset allocation away from U.S. stocks and towards non-U.S. stocks if they are confident that the dollar has further to decline. Even if investors are merely agnostic about the fate of the dollar, they may want to split their equity portfolio evenly between U.S. and non-U.S. stocks. The only scenario in which investors may want to concentrate their portfolio in U.S.-based companies is if they believe that the dollar's foreign exchange value will continue to rise even more than it already has in recent years.
FED PIVOT conclusion= BUY/SELL setupFED PIVOT conclusion to take ENTRY:
FED PIVOT 2022 looks similar to 1973:
PIVOT MONTH=if occur in DECEMBER.
POSSIBILITY= <30% rise(BULL TRAP) (17.44% already happened) till
JANUARY followed by around 40% CRASH.
FED PIVOT 2007:
PIVOT MONTH=AUGUST.
14.99% rise till october followed by 57.69% CRASH.
FED PIVOT 2000:
PIVOT MONTH=DECEMBER.
10.31% rise(BULL TRAP) till JANUARY followed by 44.44% CRASH.
FED PIVOT 1973:
PIVOT MONTH=OCTOBER.
13.11% rise(BULL TRAP) already happened
till OCTOBER followed by 45.97% CRASH.
Bad econ data = Fed Pivot = Good Mid-Term Markets = Blow-off TopTraders,
My apologies for being exempt with weekly market updates for the last several weeks. We have a lot to cover so this video will be a longer one. We'll talk Dollar, VIX, S&P500, Stocks, U.S. Housing Markets, Freight Container collapse, Crypto, and more.
I'll see you all in the next video.
Stew
Fed vs. Inflation 4:6CME: SOFR Futures ( CME:SR31! ), E-Micro S&P 500 ( CME_MINI:MES1! )
While football fans are fervently following the 2022 World Cup, we analogize the Federal Reserve’s year-long battle with surging inflation to a football match. In this game, the Core CPI had an early advantage over the Fed Funds Rate, at 6.00% vs. 0.25% in January. The Fed mounted decisive offense, raising rates to 4.00% and bringing the deficit down to 2 points. But make no mistake – we are still trailing in the game. The Fed would not accept defeat. With stoppage time and overtime, the fight against inflation could drag on well into 2023.
When could the Fed declare victory? Its stated goal is to keep inflation at 2%. Most of us think this is unrealistic. In my opinion, the Fed needs to bring Core CPI below the Fed Funds rate at a bare minimum.
The Fed has been known to be data-driven. Unless there is conclusive data showing the inflation is on the way down and the economy is cooling, the Fed is unlikely to end its monetary tightening policy.
The talk of Fed Pivot is very misleading. Slowing the pace of rate hikes doesn’t mean an overhaul of monetary policy. The Fed simply needs time to collect more data and evaluate if previous rate hikes are working.
A lot depends on how quickly Core CPI comes down. It peaked at 6.6% in September and lowered to 6.3% in October. But one data point doesn’t make a trend.
• In 2022, Core CPI ranges from 5.9% to 6.6%.
• In 2021, it was between 1.3% and 5.5%.
• The last time Core CPI fell below 4% was in May 2021.
• Before 2022, it was 40 years ago (August 1982) when Core CPI went above 6.0%.
In the past 1-1/2 years, Core CPI ran up very quickly and then stabilized at a very high level. Any projection of 4% Core CPI is not supported by data. I don’t see Fed would take such hypothesis into consideration.
Statistically speaking, bringing Core CPI down below Fed Funds rate could only be achieved by raising rates. The BLS will release November CPI data on December 13th, and the next FOMC meeting is scheduled on December 13th-14th. The Fed would have the most recent inflation data available in voting for its December rate decision.
Short-term: Fed Pivot Trade
Current market expectation is for the Fed to break its consecutive 75-point hikes. Any rate increase below 75 bp would give a big boost to market morale. Expect the stock market to rally, and the US dollar and bond yield to retreat.
CPI data release and Fed decision are the “one-two-punch” ideal for short-term event driven strategies. There are good candidates I like for potential trade setup, from a risk-reward standpoint:
• Call Options for CME E-Micro S&P 500 Futures (MES)
• Call Options for E-Micro NASDAQ 100 (MNQ)
• Call Options for CME Euro FX (M6E)
• Call Options for CME 30-day Fed Funds Futures (ZQ)
• Call Options for Three-Month SOFR Futures (SR3)
For a rate increase below 75 bp, stock market is expected to rally, so it is bullish for MES and MNQ. US dollar will pull back, so it is bullish for Euro/USD exchange rate.
Short-term interest rate futures are quoted as discounted instrument, 100 – Rate. Lowered expected interest rates translate into higher futures prices. Therefore, it is also bullish for ZQ and SR3.
Medium-term: Recession
The world runs on credit. Fed monetary tightening policies have made it more costly for businesses and households to obtain credit. The run-up in cost happened very quickly and the impacts are profound. Below are comparisons of interest rates between December 2021 and November 2022, taken from various sources:
• 30-year-fixed mortgage: from 3.646% to 7.296%
• 60-month auto loan rate: from 3.85% to 5.29%
• Average credit card rate: from 14.91% to 19.20%
• AAA corporate bond rate: from 2.06% to 4.64%
• BBB corporate bond rate: from 2.53% to 5.88%
• SBA loan rate: from 6%-8% to 11.5%-13.5%
Even if the Fed stops raising rates now, financing costs are not likely to return to previous levels. The unwinding of Fed policy takes time. There is no indication that the Fed would lower rates after the terminal rate is reached. More likely than not, businesses and households would bear high interest cost well into 2024.
While Core CPI excludes food and energy, their impacts are felt everywhere. Take diesel as an example, the national retail average price is $5.228/gallon on November 27th, according to the American Automobile Association (AAA).
• This is 58.8 cents (-10.1%) below its all-time high of $5.816 set on June 19th. However, it is still 69.7% higher than a year ago.
• Comparing to gasoline, at $3.555/gallon, it is $1.461 or 29.1% below its record high of $5.016. But it is a modest increase of 4.7% year over year.
Diesel price is a tax on all products requiring highway transportation. Fed rate hikes are not likely to lower diesel production cost. In addition, higher wages, higher rents, and higher borrowing cost would stick, long after the Fed stop hiking rates.
In my view, the US could not avoid a recession in 2023. Weakening corporate profit and elevated unemployment will eventually take a toll on stock prices.
We have witnessed a strong Black Friday sales season. But worrisome signs emerge that US consumers are increasingly constrained by their budget. According to a CNBC report, Walmart is the most visited shopping destination. Higher priced Bloomingdale and Nordstrom reported a lull in sales earlier this month.
The downgrade from premium department stores to discount stores is a leading indicator, a classic economic example that inferior products thrive during a recession.
Another warning sign, “Buy Now Pay Later” payments increased by 78% compared with the past week, according to the CNBC report. Consumers still want to get the great deals for holidays, but they need help with financing.
If the market rallies after the November CPI data and December FOMC decision, it’s a good time to set up a 3–6-month trade shorting the stock market. Investor sentiment has significant impacts in the short term. But fundamental factors will win over in the medium/long term. If inflation fails to decline materially, the Fed will stay on its tightening course.
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
Ok, here comes the Fed Pivot, what's next?With all the chatter on the Fed Pivot, we think it’s worth exploring, what happens after a Fed Pivot or Fed Pause. Let’s break down the discussion into two camps, a Fed Pause, defined as a pause in policy rate hikes, and a Fed Pivot, loosely defined as reversal of policy rates aka rate cuts.
To keep things in context, we will look at the effect of the Fed’s Pause/ Pivots on Major Indices, the Dollar and Inflation rates.
First let’s review where we are at now. The recent release of the October CPI numbers has spurred 3 notable things:
1) It knocked the dollars off its unprecedented rally since the start of the year.
2) It has given a little more credibility to the slight downward shift in inflation, with 2 consecutive lower readings.
3) It marked a local low in major equities indices
Naturally, the question is, have we bottomed? Or is this a slight breather on the elevator down…
To answer this question, we look at 2 similar periods in the past, where the fed pauses, then cut rates after. These past examples could be useful in providing some clues as to where markets might be headed next.
Dot Com Period in 2000
Between June 1999 and May 2000, rates were raised before taking a 7-month pause, following which rate cuts ensued in Jan 2001.
During this period, equities turned lower, with the DJI falling another 30% while the S&P & Nasdaq another 40% before finding the bottom.
The bottom was only in when the dollar clearly broke its uptrend, inflation peaked & turned lower and after rounds of rate cuts. In fact, and somewhat eerily, the dollar broke close to the 108 level, almost exactly where the dollar broke its current uptrend.
The Great Inflation of the 1970s
In the 1970s episode, rate hikes were paused from Aug 1973 to Feb 1974 before a cut in 1974. Untamed inflation forced the fed into another hiking cycle from March 1974 before the final onslaught of cuts from July 1974 onwards. This rate pause was then followed by another over 30% decline in equities.
Again, we find that the bottom was only in after Inflation peaked and the Dollar clearly broke its uptrend, while the Fed cut rates.
If this framework of using the Dollar, Peak Inflation & Rate levels holds, a keen observer might note the similarities with what we are looking at now. So, if the current dollar break holds and Inflation truly peaks, then the Fed Pivot will be the last piece of the puzzle to mark the bottom. So, when will the Fed Pivot you might ask?
Using the CME FedWatch Tool, we see the market implied probability of a fed pause starting in May 2023, followed by a pivot in September 2023.
In our view, this is still quite far away and if historical precedence holds, there are still ways to go before we are close to call the bottom. Additionally, market timing and expectation of a rate pause and cut have continually been re-priced higher and further over the past year. We will not be surprised if the timing and level of pause and cut get repriced unfavorably again after the FOMC minutes release this week.
From a price action perspective, the S&P seems to be near the upper band of the channel in which it has been trading since the downtrend started. This could once again prove to be an area of resistance, which could present an attractive short compared with the other 2 indices.
The average of the past 3 declines from the upper to lower band range, took roughly 54 days and 700 points. Taking that as a benchmark, we set our stops at 4150 index points, close to the previous levels of resistance, and a profit target at 3500 index points, close to the average of the past declines and lower band of the channel. Each Index point is 50$ on the CME E-Mini S&P500 Futures contract and $5 on the CME Micro E-Mini S&P500 Futures.
We will watch with keen eyes if the Dollar breakdown holds and listen for any change in the Fed’s timeline. If history is any guide, we remain bearish on equities, given the uncanny level of dollar index, inflation peak and Fed's policy path as we see now.
The charts above were generated using CME’s Real-Time data available on TradingView. Inspirante Trading Solutions is subscribed to both TradingView Premium and CME Real-time Market Data which allows us to identify trading set-ups in real-time and express our market opinions. 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
Disclaimer:
The contents in this Idea are intended for information purpose only and do not constitute investment recommendation or advice. Nor are they used to promote any specific products or services. They serve as an integral part of a case study to demonstrate fundamental concepts in risk management under given market scenarios. A full version of the disclaimer is available in our profile description.
Sources:
www.forbes.com
www.thebalancemoney.com
SHY shortterm bonds show divergence; FED may pivot end of Nov2 yr yield usually tops out 1.5 months before FED pivots. Right now shortterm bonds (inverse of yields)
are showing bullish divergence. Historically, this may predict that the FED may halt rate hikes or become less aggressive sometime this coming November. This will be very bullish for bonds & growth stocks.
Note that as of today, the 10-yr yield is still rising.
Not trading advice
GOLD broke M-neck @1678; will 1590 or 1428 be the bottom?Gold has been on a downfall since it broke the 2018 uptrendline last June 2022. It attempted to rally
but was rejected 2x at 1815 & then 1730, both along the black downtrendline from 1078 April 2022 top.
For last 5 weeks, it has been chopping around 1678, the neckline of a big M-pattern started from the July 2018 low of 1169 up to the ATH @2e20890c1d4645f3b11848906a7713
BEARISH BIAS: It already broke the weekly wma200 & is now supported by the monthly mma50 line. If gold fails to recover wma200 & break above 1678 neck & the downtrendline this week, then most probably the recent low at 1622 will also fail. The next 2 supports are 1590 & 1428.
WATCH OUT: gold cannot recover with the dollar index DXY still continuing higher. The DXY may peak out once the FED pivots to less aggressive hikes after confirming a lower CPI data for Oct. As for now investors are still selling equities & parking into dollar.
Not trading advice
BTC 2021 Fractal nears BO pt but 12k still possible if rejectedBTC seems to be repeating a 2021 pattern before it BO the black line & rallies to 69k. Similarly, it broke below the red trendline, broke above it & came down again & retested it. Is a big rally also coming?
BULLISH SCENARIO: If BTC also breaks above the black trendline in the next few days, then it will also break above the ma100 & ma50 lines & also the Ichimuko Cloud. The ultimate resistances will be the descending black & blue trendlines (you may also see them as falling wedges with the red line as base) before any true rally.
WATCHING SPY: We should watch SPY for any risk-off play as market sentiment changes quickly. I am still optimistic for an “Up UP & Away scenario” in the 4Q2022 specially if the next CPI report still supports peaking inflation & the FED becomes less hawkish.
BEARISH CASE: if BTC gets rejected in the next few days by the ma100, ma50, Ichimuko Cloud & also the
black & blue trendlines, then 12k remains on the table.
The ABC wave playbook:
BTC is so far holding 18k which is 2x retracement of wave B. Looking at the bigger ABC wave from 69k, 12k will be a reasonable destination since wave C will be equal to wave A (a perfect ABC wave).
CAUTION ahead: BTC is currently overbought & may be shortterm bearish. HOWEVER, Rsi may remain overbought for a long time in a strong bullrun.
Not trading advice but I hope this helps somebody analyze better & manage upcoming risk.
SPY will bottom before FED ends rate hikes:see contrarian viewLast August 27 I already gave the bearish scenario wherein the FED continues even into a recession. The downsides were 350, 320 & 280 IF SPY breaks below 400 & 380. Today, Friday, SPY seems to be doing an oversold bounce. So let us assume the contrarian role against the market’s extreme pessimism. What if the market sentiment changes & the market suddenly realizes that the FED is just pretending to be very hawkish just to kill that big rally from June bottom of 362?
From June low, SPY rallied a little more than 61.8% Fibonacci to be stopped by the ma200 at 431. From there it reversed down exactly to Fib 0.618 at 3900. This bullish view will take into account certain things:
*The duty of the FED is not only price stability & full employment but also to fund the government. Rising interest rates will blow up the govt debt.
*Inflation has gone down in commodities like gasoline, food, durable goods. Rents & wages are more sticky. Fuel prices will go down if Iran deal push through or if Saudi agrees to increase production. The US, unlike EU, has enough supply of natural gas.
*A FED pause is still possible in 4Q2022 or early 2023 if inflation & the economy really slows down due to demand destruction, earnings recession, lay-offs & rising unemployment. FED may keep rates steady for a while & then continues with less hawkish hikes. If rate hike is overdone, rate cuts & QE will return quickly to save jobs, the economy & control government debt.
*This may be enough for sentiment to change & for buyers to come in pushing this rebound even higher.
Let us just assume that the June low of 362 is already the bottom & SPY is doing an ABC wave up. Using Fib extensions, the possible levels are 460, 476 (double top), 500 & 530. Volatility will remain high with recession fears & geopolitical uncertainties not going away soon. See the wedge down & the wedge up.
FADING THE FED IS TECHNICALLY POSSIBLE but fundamentally less probable.
Not trading advice
SPY bulltrap again bef plunge;BO of 400/380 may see 350/320/280This is a SPY weekly chart after the Friday FED speech signaling continued hawkishness till inflation drops to 2%. Spy has a history of making bulltraps (higher highs on this weekly chart) before plunging as seen in my several boxes. It was rejected by the black downtrend line from the 476.44 ATH (see black falling wedge) & also rejected by the horizontal neckline of the H&S from top at around 330.
BULLISH SCENARIO: If 362.17 June low is the bottom for this ABC correction, then SPY should make a higher low at either the psychological 400 or 380 (previous H&S destination & also the maximum Fib 0.786 retracement of the latest June rally). From here a new ATH is coming in 4Q2022 when inflation drops lower that 4% & the FED pivots.
BEARISH CASE: SPY will not hold the 362.17 low if 400 & 380 fails. The final targets of this ABC correction may be the ff:
*350 which is the 1.618 FIB EXT of this ABC, the 0.50 retracement from pandemic low to ATH
*320 which is the 2.0 FIB EXT of ABC, the 0.618 retracement from pandemic to ATH & also near the 0.382 retracement from 2009 bottom to ATH
*280 which is the 2.618 FIB EXT of ABC, the 0.786 retracement from pandemic low to ATH & also near the 0.5 retracement from 2009 Bottom to ATH
These estimates should be considered as +/- zones & not exact levels. The pandemic low of 211.11 is not
likely to be retested.
Not trading advice
Fed Rate Hikes and BTC Bear FlagBTC appears to have another bear flag.
BTC appears to be dumping leading up to a FED rate hike.
BTC may bottom out at the FED Pivot.
