The minutes after the release of the Federal Reserve’s interest-rate decision had all the looks of another dovish surprise from the world’s most important central bank. While the Fed left its benchmark lending rate unchanged, it dropped the interest paid on excess reserves by five basis points to 2.35 percent. Even though that cut was largely for technical reasons, it sparked a rally in short-dated U.S. Treasuries, with two-year yields tumbling by as much as six basis points. Even more importantly for the economic outlook, the Federal Open Market Committee’s statement tweaked language around inflation relative to its previous meeting:
March: On a 12-month basis, overall inflation has declined, largely as a result of lower energy prices; inflation for items other than food and energy remains near 2 percent.
May: On a 12-month basis, overall inflation and inflation for items other than food and energy have declined and are running below 2 percent.
On its face, this is clearly dovish. It’s no secret that stubbornly low inflation is vexing policy makers, with Fed Chair Jerome Powell calling it “one of the major challenges of our time.” It stands to reason that observed inflation running “below” rather than “near” 2 percent could compel officials to ease. He had a chance to follow up on that during his press conference — and chose to strike a decidedly more hawkish tone, at least relative to market expectations.
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It’s no secret that stubbornly low inflation is vexing policy makers, with Fed Chair Jerome Powell calling it “one of the major challenges of our time.” It stands to reason that observed inflation running “below” rather than “near” 2 percent could compel officials to ease. He had a chance to follow up on that during his press conference — and chose to strike a decidedly more hawkish tone, at least relative to market expectations. “We expect that some transitory factors may be at work. Thus, our baseline view remains that with a strong job market and continued growth, inflation will return to 2 percent over time, and then be roughly symmetric around our long-term objective.” The S&P having rallied after an initial sell-off got slammed after the press conference with the Cash Market closing 0.8% lower at 2924 on heavier volume that we have seen over the past few weeks. The clue to this sell-off was highlighted over the past few trading session by the refusal of the VIX to sell-off. Yesterday the VIX rose nearly 10% to close at 14.80 which is well above the recent low of 12 last week.
The Dollar was weak after the FOMC Statement was release before rallying into the New York close, with the Dollar Index closing 0.2% higher. The Euro was strong initially before falling 0.2% to close at $1.1197 in New York. Meanwhile the Pound was steady at $1.3050.
Bond traders built up expectations that policy makers would be willing to take unconventional measures to boost inflation. Specifically, some central bankers brought up the idea of insurance rate cuts in the face of price growth running persistently below 2 percent. That’s why Fed Funds Futures were pricing in almost a full quarter-point cut by year-end. Despite the volatile equity market the yield on 10-year Treasuries was little changed at 2.5 percent. The cash market won’t trade until London opens this morning because of the Tokyo holiday.
Yesterday all the action was in the precious metals with Gold and Silver closing near the lows of the year at $1274 and $14.70 respectively. The Bloomberg Commodity Index decreased 0.2 percent, while West Texas Intermediate crude dipped 0.5 percent to $63.62 a barrel.
This morning on the Economic Front we have German Retail Sales and Markit PMI at 7.00 am and 8.55 am respectively. This is followed by UK Construction PMI at 9.30 am. At 12.00 pm we have the Bank of England Rate decision, followed by Governor Carney’s press conference at 12.30 pm. At 1.30 pm we have US Weekly Jobless Claims, Non-farm Productivity and Unit Labour Costs. Finally we have ISM New York and Factory Orders at 2.45 pm and 3.00 pm respectively.
June S&P 500
I was lucky yesterday with my S&P call with the market trading lower to my 2940 buy level on the release of the FOMC Statement before rallying to my 2946 T/P level ahead of the Powell press conference and I am now flat. Thankfully we had no buy levels in both the Dow and NASDAQ, especially the Dow which fell nearly 400 points from where I marked prices early yesterday morning. The S&P has strong support from 2902/2912 which must hold or else we cloud well see a large overdue acceleration to the downside. Today I will be a buyer on any dip to this area with a 2895 tight stop. I will now lower my sell level to 2938/2948 with a 2956 stop.
My Euro plan worked well with the market trading higher to my 1.1245 sell level shortly after the London Market opened before selling off to my 1.1220 T/P level and I am now flat. Today I will again look to sell the Euro on any further rally to 1.1230/1.1270 with a 1.1305 stop.
June Dollar Index
I am still flat the Dollar and today I will leave my 97.80/98.20 sell range unchanged with the same 98.55 stop.
With the DAX closed yesterday I would expect the market to open lower given the late se-off in the US Markets. The DAX has strong support from 12160/12220 and I will be a buyer in this area with a 12115 tight stop.
The FTSE had a nasty sell-off yesterday. This was overdue and thankfully we had no buy level in this market over the past two weeks. I will now lower my sell level to 7355/7385 with a tight 7415 stop. The FTSE has good support from 7150/7200 and I will be a buyer on any dip to this area with a 7115 stop.
Dow Rolling Contract
The Dow hit hard yesterday as the negative divergence vis- a- v the S&P and NASDAQ continues. This is a big concern for me especially with sentiment levels so elevated after a 5000 point rally since the low of Christmas Eve. The Dow has support from 26110/26260 and I will be a buyer on any dip to this area with a very tight 26040 stop. Despite the large fall yesterday I do not want to be short the Dow at this time.
Having nailed the top of the market at 7855 on Tuesday I should have kept this position yesterday. However the reaction to the Apple share price skewed that idea and I am still flat. The NASDAQ has strong support below here from 7610/7660 and this area must hold. Today I will be a buyer in this area with a 7570 stop.
With the Bund re-opening this morning after been closed yesterday for the May Day Holiday I will look to sell any rally to 166.20/166.60 with a 166.95 stop.
Gold Rolling Contract
I am still flat Gold and today I will now lower my buy level to 1248/1256 with a 1241 stop. I am expecting the market to have a nice rally off the 1250 support level.
Silver Rolling Contract
Unfortunately the market just missed my 15.00 T/P level with a 14.98 high print before getting hit hard into the New York close and again overnight. I will now lower my exit level to a small loss at 14.85 with the same tight 14.55 stop. If any of the above levels are hit I will be back with a new update for my Platinum Members.