The Indexes Are Hanging On By A Technical Thread (Technically Speaking For 2/17)

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Let’s take a look at some key statements on inflation from the latest Fed Minutes:

In order to anchor longer-term inflation expectations at this level, the Committee seeks to achieve inflation that averages 2 percent over time, and therefore judges that, following periods when inflation has been running persistently below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time.

Consider that statement in conjunction with this chart:

Y/Y percentage change in core and total PCE price index

Y/Y percentage change in core and total PCE price index, FRED

During the last expansion, both PCE price indexes were very tame, easily conforming to the Fed’s 2% goal. Prices are now hot enough that the Fed can’t simply let prices counter-balance the long period of sub-2% PCE. That’s a very extreme change in the inflation situation.

On that topic:

Participants remarked that recent inflation readings had continued to significantly exceed the Committee’s longer-run goal and elevated inflation was persisting longer than they had anticipated, reflecting supply and demand imbalances related to the pandemic and the reopening of the economy.

Additionally:

However, some participants commented that elevated inflation had broadened beyond sectors most directly affected by those factors, bolstered in part by strong consumer demand

At the beginning of the pandemic, market-specific factors caused the cost of specific products to rise. For example, low interest rates led to an increase in home building, which sharply increased lumber prices. There were also imbalances in the new and used car markets. Now price pressures are occurring in a broader range of markets.

In addition, various participants cited other developments that had the potential to place additional upward pressure on inflation, including real wage growth in excess of productivity growth and increases in prices for housing services.

The former would lead to 1970s style wage-price spiral, where rising prices cause employees to ask for wage increases, which forces companies to increase prices (to pay higher salaries).

Some participants reported that their business contacts remained concerned about persistently high inflation and that they were adjusting their business practices to cope with higher input costs-for instance, by raising output prices or utilizing contracts that were contingent on their costs.

We’re already seeing this to some extent in rising producer prices.

Participants generally expected inflation to moderate over the course of the year as supply and demand imbalances ease and monetary policy accommodation is removed.

This is still a decent possibility. A large supply/demand imbalance is still the primary cause of inflation. Businesses are in the process of adjusting to this situation.

Some participants remarked that longer-term measures of inflation expectations appeared to remain well anchored, which would support a return of inflation over time to levels consistent with the Committee’s goals.

This is an overall net positive still.

Let’s take a look at two sets of charts:

1-day SPY, QQQ, DIA, and IWM charts

1-day SPY, QQQ, DIA, and IWM charts (Stockcharts)

There is only one way to describe today’s charts: bad. Prices started to sell off in the early afternoon and the selling gained speed into the close. Volume accelerated as well. This is the market saying, “Let me out of here.”

6-month SPY, QQQ, DIA, and IWM charts

6-month SPY, QQQ, DIA, and IWM charts (Stockcharts)

Start with the IWM in the lower right. The rally that started at the end of January is a standard counter-trend move from a sell-off. Today’s bar took prices right to support. The SPY and DIA are right at the 200-day EMA while the QQQ is just barely at support as well.

In short, the markets are barely hanging on.

I’ll be back over the weekend with my regular weekly wrap.

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