The Federal Reserve’s May 3rd policy decision is quickly approaching, states Bill Baruch of

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

Fundamentals: Last week, a deluge of hard inflation data showed cooling prices and even pockets of disinflation via CPI and PPI, but Fed committee members and Fed Funds futures aligned to exude “more work to do.”

Last week’s hard data revealed Headline CPI Less Shelter dropping to 3.44% in March, down from 4.96% in February. This is a win. Furthermore, the Fed has referred to the Services sector as remaining stubbornly high, and it actually showed signs of disinflation Less Shelter at -0.3% m/m. Even Shelter itself could be viewed as a bright spot, although +0.56% m/m is high, it is below the three-month (+0.68%), and six-month (+0.70%) trend. As for PPI, Headline surprised to the downside with a disinflationary -0.5% m/m, versus +0.1% expected with y/y falling to 2.7%, the lowest since January 2021. Lastly, the Import Price Index went under the radar on Friday at -0.6% m/m for March, after -0.2% for February, and -0.4% for January. Prices are falling, and specifically those that producers are paying. Remember, producer prices are a leading indicator of consumer prices.

On Friday, Fed Governor Waller, known as the most hawkish 2023 voter, called for more rate hikes because “inflation is still much too high and moving sideways above the 2% target,” additionally the “labor market continues to be strong and quite tight,” he added. It was not only Waller’s comments that rattled markets on Friday but soft data (relative to hard) via the fresh April Michigan Consumer survey that showed one-year Inflation Expectations rising to 4.6% versus 3.7% expected and up from 3.6% in March. Ultimately, those Michigan Inflation Expectations shocked markets as the Fed looks to inflation expectations as a self-fulfilling prophecy, and here arises opportunity.

Coupled with the tight labor market, Waller and other Fed committee members are also focusing on broad strength throughout the economy. As of Thursday, the Atlanta Fed GDPNow model has Q1 GDP rising to 2.5%, a steady elevation over the last two weeks. Industrial Production has also shown resilience, confirmed by a rebound in NY Empire State Manufacturing this morning. The same goes for Retail Sales; although it disappointed on Friday, the three-month trend due to January’s strength cannot go unnoticed.

So where does this leave us? The CME’s FedWatch Tool shows the probability of a 25bps rate hike at the Fed’s May 3rd meeting rising to 86.7% today, from 78% Friday morning, and from 72.2% one week ago. On Friday, the US Dollar Index rejected a test of the February 2nd low, and 10-year Note yields have been rising for the last week and a half. For what it’s worth, our CTA Blue Creek Capital Management went short the euro on Friday. The market is telling us something, pricing in one more hike from the Fed, and this a complete parallel to 2018. What is another 25bps? The token hike from 4.75% to 5.00% does not really change anything, but it is just that, a symbolic move by the Federal Reserve showing how serious they are in the bank’s fight against inflation.

Today’s lengthy write-up is meant to help provide a backdrop in how I view the markets and the opportunity within them leading into that Fed decision two weeks from Wednesday. That is where I will conclude below. 

At the Fed’s last hike in the 2018 cycle on December 20th, when the S&P was -17% mind you, the bank said it planned to hike two more times in 2019. That never happened. Instead, they cut three times that year, with the first coming in July. Although we currently do not find ourselves in the fear-mongering recession camp, how could you with this data, again we cannot ignore the fact things will slow. However, between now and then, the Fed cannot allude to any holes in its steadfast mission and like in 2019 they will squeeze in that one last hike. The opportunity between now and then has begun lifting the US dollar and rates for what could be a “buy the rumor, sell the news” event, and that is how we plan on playing it.

Technicals: Despite the narrative above, we remain cautiously bullish in bias equity markets. At the end of the day, the E-mini S&P and E-mini NQ have done nothing wrong, continuing to consolidate in range after a significant rally. Furthermore, all of last year priced in the headwinds everyone feared, and like 2019 the market looked through the Fed narrative. For example, look at Friday’s weakness and the resilience to rebound to nearly unchanged, especially after the shocking Michigan one-year Inflation Expectations. This has created two waves of strong support in each of the E-mini S&P and E-mini NQ, major three-star support levels are highlighted below. We cannot ignore the potential of a head and shoulders top in the S&P, and a close below those supports could help turn that into fruition for the very near-term; it will be important to stay nimble. We also cannot ignore significant overhead resistance; the S&P and NQ must close out above these in order to begin confirming the next leg higher. 

Last week’s close: Settled at 82.43, up 0.39 on Friday and 1.75 on the week. 

Fundamentals: Crude oil is consolidating after the taste of a breakout last week. US dollar strength and the discounting of a more hawkish Fed, per our discussion in the S&P/NQ section, weighed on broader commodity sentiment to finish last week. However, crude can decouple from Fed headwinds with a deluge of economic data from China in focus tonight. On Friday, the IEA cited the China reopening as underpinning record crude demand this year.  

Technicals: Price action has struggled to sustain its breakout above $83, but it has not surrendered the latest surge on April 12th within its two-week long elevation, which aligns to bring major three-star support at 81.45-81.76. However, there are clear signs of exhaustion this morning with the tape below our pivot and point of balance, which aligns with our momentum indicator.

Gold (June) / Silver (May)

Gold, last week’s close: Settled at 2015.8, down 39.5 on Friday, and 10.6 on the week

Silver, last week’s close: Settled at 25.46, down 0.465 on Friday, and up 0.367 on the week

Fundamentals: Gold and silver incurred a sharp reversal Friday due to the one-two punch from Fed Governor Waller and the Michigan Inflation Expectations, all discussed in detail in the S&P/NQ section. Markets have been quick to discount a more hawkish Federal Reserve, underpinned by their belief inflation expectations are a self-fulfilling prophecy. The other point that must be factored in is that bank earnings kicked off Friday and were broadly good; gold received a safe haven bid during the height of the banking crisis. For now, some of those safe-haven tailwinds are being removed. While gold and silver are again under pressure this morning, we view this as an opportunity, they have a history of shakeouts before breakouts. As discussed in the S&P/NQ section, there is a “buy the rumor, sell the news” setup for the US dollar and rates, therefore the inverse for gold and silver.

Technicals: Gold and silver are testing into critical areas of technical support, and today’s close will prove to be paramount. Will gold respond to major three-star support at 1992.2 and settle back above the psychological $2000 mark? Will silver utilize major three-star support at 24.75-24.95? If the bears remain in the driver’s seat, this could open the door to a soft tape over the next two weeks, leading in the FOMC meeting. In order to dig out of these lows and confirm a shift back to bullish momentum, Gold and silver must achieve a close above major three-star resistance.

Learn more about Bill Baruch at Blue Line Futures.