S&P 500, USD Talking Points:
The inflation story in the United States continues to build and the longer we go the less and less ‘transitory’ that it all looks. While prior months saw numerous explainers about how inflation was uneven and likely to abate as much of it was coming from areas like automobiles, this month’s print doesn’t have such context as the rise in prices was fairly broad-based across the basket.
Last month offered a bit of a reprieve: While CPI last month did print at 7%, it also came in right at the expectation. The net result was a move of USD weakness as stocks jumped, driven by the hope that we were starting to see the highs in CPI.
But a month later and those hopes have been dashed as this morning brought back another trend of upside surprises in CPI, with headline CPI printing at a whopping 7.5% v/s a 7.3% expected. Core inflation similarly came in hot, showing at 6% versus an expectation of 5.9%.
The below chart illustrates just how profound and out of the norm this inflation run has been, looking at CPI growth going back to January of 2017.
CPI Growth Rate in the United States since 2017
Chart prepared by James Stanley
Probably the most obvious area of impact is the US Dollar. The USD has been relatively weak over the past two weeks, and that came after a profound run of strength that was triggered by the January FOMC rate decision.
And leading into that was another bout of weakness, but that one was driven in by last month’s CPI print. From the four-hour chart below, we can see the oscillation between oversold and overbought conditions over the past month, with the most recent iteration being a bounce into resistance from an oversold reading that began to show last week.
The US dollar is now re-testing a key zone of resistance: If bulls fail here the outlook for the USD could grow considerably more bearish. In the current zone of resistance are a series of familiar levels, starting with 95.86, which is the 50% marker of the 2001-2008 major move. Above that are additional Fibonacci levels at 96.04 and 96.10, after which the February high shows at 96.24.
A breach above 96.24 can re-open the door for longer-term bullish scenarios in the USD. If today’s bar closes inside of 95.86, short-side scenarios can remain of attraction.
US Dollar Four-Hour Price Chart
Stocks Pull Back
The initial response in equities was a fast and aggressive move of weakness. As the US equity session opens for the day buyers have started to pounce already. It’s still very early so the way that today’s daily bar closes will be key.
In the S&P 500, prices started the session at a significant area of resistance on the chart, right at 4580 which is the 61.8% Fibonacci retracement of the January sell-off. Just above that is another major zone, spanning from 4590-4600.
Yesterday brought a consistent topside trend that stalled right at 4580, and this morning’s inflation print helped to elicit a stern drop down to a low of 4512. For today’s session, short-term resistance potential remains around 4549. If bulls can force a breach of the 4590-4600 zone, that would be very bullish. For bears to regain control, a break-below 4500 would likely be needed to show that sellers can take out some of these very obvious supports.
The big item of interest here is whether the bearish theme that started to show in January begins to make its way back, or whether buyers will be able to continue re-gaining control as we’ve seen over the past couple of weeks.
S&P 500 Four-Hour Price Chart
The source of the next few days’ worth of volatility will likely emanate from the continued quandary around rates. After the really strong NFP report last Friday, the door is seemingly open for the Fed to get much more hawkish. This morning’s inflation data again confirms that, with markets now giving strong probabilities of a 50 basis point hike in March, followed by another four or five hikes later in the year.
As such rates remain in focus and this morning marks the first time that the 10 Year US Treasury Note has yielded more than 2% since July of 2019 – a full six months before the pandemic came into the equation.
This is what can cause pressure to equities, and as I’ve looked out through the month of January, there’s a building bearish case. Early in the month I looked at the prospect of a deeper turn and after that showed very quickly, a bounce began to show in late-January as US equity indices were in deep oversold territory.
But I’ve remained suspect of that bounce and even this week started plotting for possible returns of the bearish theme in stocks. This morning’s CPI data could be that driver to bring sellers back into the fray, but this is all just theoretical without price action, which is what makes today’s price behavior with the aforementioned levels so important to near-term directional themes.
US 10 Year Treasury Note Yield – Weekly Chart – 2% Yield
— Written by James Stanley, Senior Strategist for DailyFX.com
Contact and follow James on Twitter: @JStanleyFX