It is CPI Day, and the prized inflation indicator was due at 7:30 am Central Time, states Bill Baruch of BlueLineFutures.com.
Fundamentals: Analysts expected the headline read to rise +0.2% month-over-month, while the Cleveland Fed’s Inflation Nowcast model is signaling a +0.32% bump. On a year-over-year basis, they are at 8.1% and 8.2%, respectively. Historically, core inflation, excluding food and energy, has been watched most closely. However, the Fed has communicated it is most concerned with the real impact on consumers, including the volatile prices paid at the pump and grocery store. It is also likely some political jawboning was behind that rhetoric, given the White House’s questionable effort to bring down gasoline prices by liquidating the country’s Strategic Petroleum Reserve. If so, it may have backfired as Core CPI remains the stickiest month-over-month and is expected to rise by +0.5%. Four of the last five months have risen 0.6% or more, with the year-over-year read for September elevating for the second consecutive month and back to the cycle high of 6.5% hit in March. To make matters worse, the Cleveland Fed model is signaling 6.62%.
E-mini S&P (December) / NQ (December)
S&P, yesterday’s close: Settled at 3588.50, down 10.75
NQ, yesterday's close: Settled at 10,840.50, down 4.50
Inflation has been the front page narrative, so to speak, for at least a year now. Expectations are entrenched in higher inflation and more so when the stock market is at pessimistic levels. The S&P is now 15% lower than when the August CPI report was released on September 13. At that time, many market participants had reinvigorated hopes after a historical 20% surge from the June low through August. That CPI report forced a quick recalibration of those expectations, and a two-week bloodbath ensued, heck it’s still going. Today’s report does not come with those same lofty hopes, instead being delivered like the June CPI report in July, amid excessive negativity, which paved the way for that historical 20% surge. The only difference now is the early look for October has continued to levitate, with month-over-month headline CPI, via the Cleveland Fed model now pinging +0.8%. However, to devil’s advocate the devil’s advocate, has the rise in October’s forecast and Fed’s rate hike expectations mounted too much given a deteriorating economy? Furthermore, we believe summer spending, anchoring higher inflation, is now in the rearview mirror, and Owner’s Equivalent Rents, a drastically lagging indicator that makes up one-third of CPI, are due to peak out as early as Q1. This brings a lot of potential for a stock market -25% on the year, experiencing excessive negativity, and about to enter a seasonally bullish time of year.
Technicals: Since the start of Q4, we have found value and limited downside at S&P -25%, and this led us to take a cautiously Bullish approach from the right levels. We then took a Neutral approach since Tuesday’s direct test and fail at our major three-star resistance at 3647-3653.25. As we exuded above, we remain optimistic from these levels, especially given sentiment dynamics, seasonality, and discounted fundamentals. Therefore, we will reintroduce a cautiously Bullish approach and bubble-wrap it with the market’s reaction to the CPI data through the first hour of trade. Despite yesterday’s weakness, the S&P held our second barrier of strong support at 3587 on a closing basis, while the NQ also continues to nudge a fresh closing low. Wouldn’t it be fitting to have bears trapped amid such a pessimistic close? At the end of the day, rally attempts are just that, attempts, until a close above major three-star resistance at 3647-3653.25 in the S&P and 11,101-11,134 in the NQ. Even so, true short-covering is not likely to start until a break above our next major three-star resistance in the S&P and NQ
Crude Oil (November)
Yesterday’s close: Settled at 87.27, down 2.08
Fundamentals: US inflation data is front and center, but we get weekly EIA inventories at 10:00 am CT. Yesterday afternoon, the EIA, in their Short-Term Energy Outlook, joined OPEC in lowering their demand outlook. This morning, the IEA also slashed its forecast for 2023 world Oil demand growth by 470,000 bpd, about 20%. However, they joined the criticism of OPEC+, saying, “Their supply cuts increase energy security risks worldwide.” Price action remains little changed at the onset of US hours after the private API survey showed a much larger build than expected last night for Crude at +7.054 mb. They also had +2.008 mb Gasoline and -4.560 mb Distillates. Expectations for today’s official read are +1.750 mb Crude, -1.825 mb Gasoline, and -2.05 mb Distillates.
Technicals: We have a very Neutral approach right now after the rally we anticipated has played out. Price action is working to chew through major three-star support at 86.68-87.04, and a close below here would break a shelf that was built through the back half of last week, giving the bears a clear near-term edge. Still, traders do not want to chase ahead of EIA, given that we have layers of strong support below the market.
Gold, yesterday’s close: Settled at 1677.55
Silver, yesterday’s close: Settled at 18.938, up 0.549
Fundamentals: A hotter-than-expected CPI report has bludgeoned Gold and Silver, as it has all asset classes. Overall, the dataset was not too much off from the Cleveland Fed Inflation Nowcast model detailed in the S&P/NQ section, but an overall strong headline MoM at +0.4% and Core MoM at +0.6% has quickly forced a recalibration. Also, considering the super-hot expectations for headline October MoM at +0.8%, markets are reacting very spooked. There is now basically a 100% probability the Fed hikes by 75bps on November 2nd, and now a 61.8% probability for another 75bps in December, a rise from 32.5% one day ago. Of course, the US Dollar has spiked, but it is the Treasury landscape bringing the pain, with two-year yields hitting 4.50%, ten-year yields at 4.075%, and 30-year yields at 4.00%.
Traders want to keep a pulse on the UK after Prime Minister Truss said the government is considering raising the corporate tax rate in a bit of a policy reversal. Before today’s hot CPI, this had encouraged strength in Treasuries and weakness in the US Dollar.
Technicals: There is nothing to like about today’s price action in Gold and Silver in the near term, but we cannot ignore the levels in which they are testing. There was significant volume traded between 1633.4 and 1655.6 in Gold through late September, and Silver is testing trend line support from its September first low. After such a broad bloodbath, we would consider today to be constructive for Gold if it could manage to settle back above our pivot point.
Learn more about Bill Baruch at Blue Line Futures.
