Inflation data is front and center this morning with the US CPI, states Bill Baruch, president of

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

S&P, yesterday’s close: Settled at 4705, up 42.75

NQ, yesterday’s close: Settled at 15,831, up 223.00

Fundamentals: On Monday, we asked ourselves in the Midday Market Minute; “Is this indiscriminate selling, or will markets use an early low to pare losses into Fed speak and CPI, remaining reliant on the narrative?” I think we have our answer, both US equity benchmarks and yields have paused. Core CPI is watched most closely, in December it is expected to have risen by 0.5% MoM and 5.4% YoY. With five of the last eight months incurring gains of at least +0.5%, inflation is clearly building, and at 5.4% YoY, it would be the highest since March 1991. There are two sides to this coin. First, inflation is inherently a rate of change datapoint. After such a steadfast move since April, we will soon see higher base comparisons, thus muting the rate of change. To the other end, there are inflationary factors that are poorly interpreted within these numbers, such as owners’ equivalent rent, which has significantly lagged the trajectory of home prices. As we look at today’s read and how it may impact markets, if it is much hotter than expectations, we are likely to find ourselves in a similar trading environment as the one we finished last week and began this. We say much hotter because the Federal Reserve has already messaged a hawkish path, a first-rate hike in March with nearly a 90% probability and a second one in June with better than 70% probability. However, if Core CPI only marginally beats or comes in below expectations, it would invite risk-on by not forcing the Fed to move faster than already priced in.

It is important to note that CPI in China fell MoM by 0.3% in December. It and PPI both came in below expectations YoY. Also, loan data in China was below expectations. This gives the PBOC some flexibility to ease, just as the Federal Reserve embarks on a tightening cycle.

Technicals: Price action remains firm. The S&P has surpassed its 50% retracement back to its all-time high, whereas the NQ faces this level directly overhead. As we spoke of above in the Fundamental section, today’s interpretation of the CPI data will play a massive role in driving the tape. There was a good low formed early yesterday in both. For the S&P this was 4627.25 and aligns with a knee-jerk swing on Monday to create major three-star support. For the NQ, it is that December low of 15,495 aligned with yesterday’s early low at 15,475. If the indices surrender their respective levels, we expect the selling to pick up. To the upside, they are facing resistance aligning with Thursday’s high, where there was significant volume keeping rally attempts in check, this is major three-star resistance at 4712-4718.25 in the S&P and that aligning also aligning with the 50% in the NQ at 15,895-15,906. If these levels are cleared, both indices, more so the NQ, can begin repairing damage.

Crude Oil (February)

Yesterday’s close: Settled at 81.22, up 2.99

Fundamentals: February crude oil is testing its high on the entire pandemic recovery at 82.13, achieved on October 25th. However, front-month crude, December at the time, did trade as high as 85.41. WTI is outpacing Brent this morning with weekly EIA data released this morning. Late yesterday, the private API survey was not very supportive, printing -1.077 mb crude, +10.086 mb gasoline, and +3.035 mb distillates. However, last week’s official EIA data had a build in gasoline more than 3 mb larger than API, and we are likely seeing some lag. Still, official expectations for today’s report are -1.904 mb crude, +2.408 mb gasoline, +1.757 mb distillates. Levels at Cushing, refinery utilization, and net imports will be watched closely. We will add that product inventories can be very distorted at the end and start of the year due to tax planning and it was clear that last week’s results were taken with a grain of salt. Lastly, the subdued data from China, cited in the S&P/NQ section, has brought a supportive hand to commodities and a two-day surge in natural gas is also underpinning the energy complex.

Technicals: The tape is very strong and chewing through major three-star resistance at 81.59-81.73. The February contract brings resistance at its October peak at 82.14-82.25, but we overall see a close above our major three-star level as continuing to pave a path of least resistance higher. To the downside, in this more fundamentally driven session, our rising momentum indicator aligns to bring first key support.

Gold (February) / Silver (March)

Gold, yesterday’s close: Settled at 1818.5, up 19.7

Silver, yesterday’s close: Settled at 22.812, up 0.35

Fundamentals: A lot of what we said in the S&P/NQ section applies here for the metals. If Core CPI comes in much hotter than expected this morning, it will encourage a faster tightening cycle by the Federal Reserve. However, a rate hike in March and a second one in June are priced in with increasing certainty, nearly 90% and better than 70% probabilities, respectively. This means gold and silver would find inflation at and below the expectations favorable. Lastly, looking back at the October CPI read, released in November, it came in hot, yet gold and silver surged. This was because it came days after the Federal Reserve already laid out their messaging and taper timeline. Given, the aforementioned probabilities, we believe this gives gold and silver room to run as long as the read does not come in too hot.

Technicals: Gold and silver both cleared the 21-day moving averages yesterday and this could be a sign the bulls are re-gaining the driver’s seat. We also took a more bullish view here. Still, the line in the sand is drawn and we have rare major four-star resistance in gold at 1829-1835; it must close above here, or it faces heavy waves of selling that could quickly take it back to the bottom-side of this range, rare major four-star support at 1783.6-1787. As for silver, it must first clear the 50-day moving average that now aligns with key resistance at 23.15-23.24 and then major three-star resistance.

Learn more about Bill Baruch at Blue Line Futures.