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The Power of PowellCME: E-Mini S&P 500 Futures ( CME_MINI:ES1! ) If the characters of Game of Thrones were on the financial markets, who would be the unchallenged “King of Wall Street” in your eyes? Since Federal Reserve set sail on tightening monetary policy, all markets fell under the spell of Fed rate hikes. Federal Open Market Committee meetings are major market-moving events. Investors around the world not only watch what the Fed does, but also listen closely to what it says and does not say. The Fed raised 75 basis points last Wednesday. It is bad news for households and businesses alike. The cost of living and the cost of running a business both went up at the same time. The cumulative effect of +3.75% in eight months has been extraordinary. Interestingly, US stock markets jumped upon the release of Fed statement. Rate hike of 75 bp was expected, but investors thought they found some signs of Fed softening, which sparked the “Fed Pivot Trade” and pushed the Dow up 400 points and the S&P up 1.5%. However, when Chairman Powell delivered his speech half an hour later, the market immediately headed to a 4% plunge. His words, “it’s premature to think about pausing”, ditched any hope of easing in the foreseeable future. What Economic Data? I have an interesting observation: major economic data has mostly been reduced to a data point for interpreting future Fed decisions. Discussion of CPI data is not focused on how much food and rent cost went up and why, but whether the decline from 9.1% to 8.2% is sufficient to alter the rate-hike trajectory. Good non-farm payroll data and low unemployment rate are not celebrated for a strong employment market but being interpreted as the Fed needs to do more. Corporate profit may be good for a stock, but not for the stock market. If inflation is stubbornly high and six consecutive rate hikes have not cooled down the economy, more tightening is needed. When interpreting Fed’s policy decision, good could be bad and bad could be good. That is absurd. Repricing with the Gordon Growth Model On August 29th, I launched a series on “The Great Wall Street Repricing”. As high interest rate and high inflation rate become the new fundamental assumptions in investing, all financial products would go through repricing. Based on the Discounted Cash Flow (DCF) Model, a company’s valuation is the present value of its future cash flows. High interest rate raises its cost of capital. High inflation raises its cost of good sold and reduces its sales volume, resulting in lower cash flows. The combined effect is a decline in the stock price. Since high interest rate and high inflation affect all companies, this devaluation applies to stock market indexes as well. How much will the market decline? This is a $1 trillion question. I use Gordon Growth Model (GGM) to come up with a more quantitative estimate of stock index valuation. The formula for Gordon growth model: P = D1/(r-g) Where: • P = stock price • g = constant growth rate • r = rate of return • D1 = value of next year's dividend Like DCF, GGM states that the stock's value equals the sum of the present value of future dividends. However, GGM assumes that there is a constant growth in dividends. Free cash flow in the Terminal Period determines the intrinsic value of a company. Let’s see how GGM values $1 dividend per share under various assumptions. First, we use Year End 2021 data as a baseline case: • Given that BBB corporate bond rate was below 3%, I assume r = 4% • Perpetual growth rate g = 2.5%, which is very reasonable • P = 1.025 / (0.04-0.025) = $68.33 • S&P 500 closed at 4,766.18 on December 27th, 2021 Now, let’s make a forward-looking estimate based on what we know today: • Fed Funds rate is 4% now, and I expect it to go up to 5% next year • BBB corporate bond rate is now 6.34%. Adding the expected increase in risk-free rate, I assume the new r = 7.5% • With a pending recession, dividend growth rate will be reduced to g = 2% • P = 1.02 / (0.075-0.02) = $18.55 • S&P 500 settled at 3,770.55 last Friday, down 20.9% year-to-date Based on our GGM calculations, the fair value of S&P 500 index should be at 1294 points, or 73% below its 2021 year-end value. This indicates that the index could fall 2,477 points further from here, or -65%. GGM is by no means an accurate stock market pricing model. You could twist the assumptions to your liking and come up with very different values. It’s okay that you disagree with the logic behind GGM and prefer a different valuation model. However, our illustration is a shocking revelation of how vulnerable stock prices are to rising interest rates and slowed growth . There is a lagging effect in monetary policy. We have not seen the full extent of the impact from rising rates. Companies are partially insulated with fixed-priced costs negotiated from prior year, such as office lease, supplier contract, business loan interest, and wages of existing workforce. However, they will all go up when the contract is up for renewal. There is another reason for a downward trend in stocks – year-end selling. Many investors have taken a hit of -20% or more this year. They would sell the losers before the end of the year for tax purposes. Institutional investors will also need to rebalance their portfolio at this time. They are highly unlikely to take on new risks. The bear market is far from over. And the worse has yet to come. Shorting the E-Mini S&P futures ( CME_MINI:ES1! ) is still a viable strategy. Meanwhile, as long as Fed continues tightening the money supply, we’d better buckle up the seatbelt for a bumpy ride. Happy trading. *Trade ideas cited above are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management under the market scenarios being discussed. They shall not be construed as investment recommendations or advice. Nor are they used to promote any specific products, or services. CME Real-time Market Data help identify trade set-ups and express my market views. If you have futures in your trading portfolio, check out on CME Group data plans in TradingView that suit your trading needs www.tradingview.com
CME_MINI:ES1!Short
by JimHuangChicago
25
XAUUSD : TIDE TURNEDMajor bullish break-out for Gold, as the price finally closed above our expected Resistance level (4H MA200) that we have been talking about in the last two weeks, and even broke above the 1D MA50 and the Lower Highs trend-line that started all the way from the March 08 Market Top. Even though it is premature and only marginal, this 8-month Channel Down pattern, broke to the upside. Technically it is an early sign of shift from bearish to bullish long-term, especially since Gold has formed a (rough) Triple Bottom on the September 28, October 21 and November 03 Lows. On the short-term, as long as the 4H MA50 supports (1,651.40) Gold should target the 1,729.50 - 1,735 Resistance Zone of September. A closing below the 4H MA50, is a sell call targeting 1,620 again. Ahead of the U.S. CPI on Thursday, we see the DXY maintaining its +1 month pull-back while the US10Y is neutral within a Triangle supported by its 1D MA50 still. All prices mentioned on my analysis are on XAUUSD.
OANDA:XAUUSDLong
by MolfDassler
Nasdaq100 Simple Chart AnalysisBase on Nasdaq chart perspective, it will tell us some interesting movement here. If those red line supporting 10450 area can be supported before CPI data announce, very high chance it could be a positive one & tech market could rebound from there. For a solid trend progress, 11678 area must break. On the macd & chip indicator is still on weak side. CTA Market Outlook Good day everyone, CPI CPI CPI ! nothing is more important than that ! Ever since Feds had jeopardize the hope of reviving bull, CPI is the only hope now. They are expecting a 8% data outlook. Market will cheers if the data is lower than expected & vice versa if is higher. If is higher, this means current hike rates is not aggressive enough & bear would be much fierce ahead. This is why defensive mode is require back there for conservative trader to survive this bearish market. Else majority holding would continue to slump further down & the damage wise will be a hard turn around. While conservative traders are on a defensive mode, aggressive traders might interested in energy sector here cause recently there are some momentum on going. Let's dive straight into these interesting chart as below.
OANDA:NAS100USD
by FFCloud
AUD/USD Outlook (26 October 2022)The AUDUSD is once again testing the 0.64 resistance level. This current move higher is due to the weakness in the DXY as the price trades lower toward the 110 support level. However, for the AUDUSD to trade above the 0.64 resistance level, and to sustain a continual move higher, look toward the CPI data to be released (Forecast: 1.6% Previous 1.8%) If the CPI data gets released below 1.6%, this could signal that recent rate increases from the RBA are taking effect. Which would further indicate that future rate hikes could either slow down or be done at a smaller scale. Which could in turn help the AU economy avoid a possible recession, leading to the AUDUSD trading higher. The next key resistance level is 0.6545.
Long
by JinDao_Tai
Fed pivot indicatorThis chart is essentially proxy for the acceleration rate of interest expense for the US government, and has been a reliable indicator of fed pivot for 30+ years as the fed has ensured the US doesn't enter a debt death spiral. To keep this line 'inbounds' they need the middle of the curve to fall ~75bp between now and the 24th Or maybe they'll allow a brief spike above, and given the length of that chart, maybe 'brief' can be a number of months But as far as what would be normal fed behavior, we're at the tightening limit for interest rates twitter.com
FRED:FEDFUNDS
by givanse
5
Inflation Rate against CPI IndexAs you can see - all crashes on SPX have been synced with the above chart dipping big time. What do we have now ? The chart hasn't even gone down - yet SPX has dipped -27%. The difference between SPX's TOP and the start of declining of Inflation Rate / CPI is of an average 15-18% decline on SPX. The only problem is that we haven't even started properly declining (circled area). Two assumptions based on this - Either we still have time in this market and this was just a correction... or... ... the fall will be huge. Personally expecting markets to recover a bit and soon inflation rate will spike down together with SPX falling. Not investing big time before seeing a proper spike down. Cheers!
ECONOMICS:USIRYY
by TheSecretsOfTrading
US CPI October 2022 Forecast Related to USOIL PriceBuy the dollar till the DXY index hit 125. Some of you might have been familiar with my US CPI forecast based on Oil and last time in September 2022 CPI I predicted 8.1%-7.8% during pre-data release. Turns out the MoM inflation for September 2022 was at 8.2%, a bit off 0.1% from my forecast. So what happened here actually? As you can see that during the September period the price of USOIL ranged from 90-81USD per barrel from 1-23 September and then break to around 76USD per barrel during the fourth week of the month. Of course, the fourth week of the month did not give any significant impact on the final calculation of the CPI due to the price range from the first to the third week already at 90-81 per barrel. Now, in the first week of October, USOIL started rallying back again to 93USD per barrel due to a supply cut from OPEC+. As for the current situation the USOIL raging from 93-82USD per barrel which is considerably high still. I am predicting that inflation in the US is not yet cooled down and will be raging around 8.4-8.1%. 75bps hike is already on the table but the question is if the inflation on October 2022 gives a shock to the FED, will they consider 100bps at the next meeting? I am also waiting for the USOIL price to react to the Joe Biden move in which released the Strategic Petroleum Reserve. Currently, there is not enough data to conclude that USOIL prices will go down as the OPEC+ members cut oil production which is an equal move to Joe Biden. That's it for my forecast. Just buy the dollar.
FX:USOIL
by User54215116081
GBP/USD steadies after rallyGBP/USD has edged lower today, after starting the week with sharp gains. In the North American session, GBP/USD is trading at 1.1334, down 0.18%. The pound continues to show strong volatility as the political saga continues in the UK. Truss finally stopped blaming the markets and "global headwinds" for the decline of the British pound and UK gilts on Monday, saying she was sorry for going too "far and too fast" with her economic plan. Truss has insisted she will continue on as leader, but the restless Conservatives, who have sunk in the polls, could decide to pull the plug on Truss' disastrous leadership. Jeremy Hunt, the new finance minister, wasted no time in abolishing most of the tax cuts contained in the recent mini-budget and told parliament that spending cuts and tax increases were coming, an astounding U-turn. Hunt scaled back the plan to cap energy bills for consumers and that could mean higher inflation. The markets liked what they heard and the pound soared by 1.5% on Monday. Still, the soft economic outlook and the political chaos which has rocked the UK are strong headwinds which will likely weigh on the pound. The UK releases CPI for September on Wednesday, which is expected to edge higher. Headline inflation is projected to hit 10.0%, up from 9.9%, and core CPI is forecast to rise to 6.4%, up from 6.3%. With no sign of inflation peaking, the Bank of England remains under pressure to continue raising interest rates at the November 3rd meeting. Goldman Sachs has downgraded its UK growth outlook, with the economy expected to decline by 1% in 2023, worse than the previous estimate of -0.4%. GBP/USD faces resistance at 1.1373 and 1.1455 There is support at 1.1214 and 1.1085
by OANDA
Today is the Best Day in the Next 12 MonthsWhat We Expected When the ball dropped in Times Square at midnight December 31st, we had very good reasons to cheer for Year 2022. S&P 500 ended 2021 at 4,766.18, up 27%. In fact, the index was more than double in a 2-year bull market since the pandemic drove it down to 2,230 in March 2020. U.S. Bureau of Labor Statistics (BLS) reported monthly growth of nonfarm payroll by 648K, 249K and 199K in October to December, respectively. U.S. regained 18.8 million jobs since April 2020. This accounted for 97.7% of the total job losses due to the pandemic. BLS also reported the Consumer Price Index (CPI) at an annual rate of 7.0%. AAA regular gasoline retail price averaged $3.28 a gallon nationwide for the last week of December. Fed Chairman Jerome Powell insisted that inflation was “transitory”. Firstly, this was due to the bottleneck in the global supply chain, which had been disrupted by the pandemic. But we were already coming out of the pandemic. Global trades would be normal again soon. Secondly, Congress passed a $1.9 trillion stimulus bill in March 2021. Pumping money in the financial system obviously pushed demand and price-level up. After all, most of us could afford higher prices with the $1,800 stimulus check from the Trump Administration and $1,400 more thanks to President Biden. Meanwhile, Fed Funds rate was at its lowest level in 0%-0.25% range. Thirty-year fixed mortgage rate averaged 3.11% at the year-end 2021, according to bankrate.com. What Actually Happened Fast forward to October 13th 2022. BLS reported a higher-than-expected CPI at 8.2% annual rate in September. The Core CPI, which excludes foods and energy, ran at 6.6%, its highest level since 1982. When U.S. market opened, S&P 500 dropped below 3,500. While it posted a historic turnaround later in the trading session, it proved to be a “dead cat bound”. On October 14th, the S&P fell 2.37% and closed at 3,583.07. This is a year-to-date return of -25.3%. Since March 2022, the Fed has engineered five consecutive rate increases. Fed Funds rate is up 300 basis points to 3%-3.25%. More rate hikes are expected at the November and December Federal Open Market Committee meetings. After all the rate increases have been completed, the terminal rate is widely believed to be above 5%. Thirty-year fixed mortgage rate is now 7.73%, a whopping 4.63% higher compared to the end of last year. Home ownership is increasingly out of reach for young adults. Central bank tightening has not yet cooled the runaway inflation. Reading the CPI data by category, you will find that everything went up except for gasoline and diesel. However, gas has bottomed in September and has been creeping up in the past three weeks. So has diesel. Without their offsetting, inflation is likely to stay high in the coming months. We are on the verge of a recession. The question is not if, but when and how deep. The global economy faces strong headwinds: • High interest rates • High inflation • A regional war that lasted eight months with no end in sight • An energy: Russia turns off natural gas and OPEC+ cuts oil production • Political uncertainties: US midterm election, new governments in the UK and Italy Stock Index Trade Ideas In the past five months, I discussed 20 trade ideas on TradingView, ranging from equity index to interest rates, foreign exchange, energy, metals, agricultural commodities, and cryptocurrency. Let’s revisit three ideas on stock indexes and see if they still make sense today. “Bear Market is Far from Over” was published on June 22nd. I suggested that the S&P would test its support line at 3,383, its pre-COVID peak. Thursday’s low was within 100 points from reaching this level! Mindful that this occurs when the US economy is still growing. Imagine where the S&P would go when we are in a recession. In “The Great Wall Street Repricing”, I used the Discounted Cash Flow model to illustrate why the stock market has to fall. • High interest rate raises the weighted average cost of capital (WACC). It enlarges the denominator of the DCF equation and makes the present value smaller. • High inflation increases the cost of goods sold. Higher price tends to reduce demand. The combined result is lower free cash flow and a smaller numerator of the equation. Seven weeks after publishing this idea, I observe that both interest rate and inflation rate are higher than originally expected. So the repricing impact would be even bigger. At “Tale of Two Americas”, I explained why Small-Cap index Russell 2000 could fall harder than the Blue-Chip S&P 500 during a recession. • The component companies in the Russell 2000 have lower credit ratings and higher WACC • Recession would have a bigger impact on the revenue and profit of smaller firms • Russell has lofty P/E ratio. The bubble would burst in an economic downturn Bearish Trading Strategies Three strategies for your consideration: 1) Short the S&P 500; 2) Short the Russell 2000; and 3) Long the S&P-Russell Spread. CME S&P 500 Futures ( CME_MINI:ES1! ) ES is one of the most liquid equity index futures contracts. It traded 3.3 million lots last Thursday. If you bark at its $10,000 initial margin, try the Micro E-Mini S&P ( CME_MINI:MES1! ). It is 1/10 the size of ES and requires only $1,000 in margins. When is a good time to short? I would wait for a bear market rally like last Wednesday. There will be many of them. Investors are hopelessly romantic with stocks. A better-than-expected company earnings, or a less hawkish tone from the Fed, could be interpreted as good news, even for a one-day wonder. CME Russell 2000 Futures ( CME_MINI:RTY1! ) RTY traded 324,814 lots last Thursday. The index is more overpriced than the S&P and we could make a bigger payday shorting it. Initial margin is $5,500. Similarly, the Micro E-Mini Russell ( CME_MINI:M2K1! ) is 1/10 of RTY and requires only $550 in margins. As with the ES, I would wait for a rebound before putting in a short RTY position. Long ES-RTY Spread If you are not comfortable with an outright short futures trade, consider the spread between S&P and Russell index futures. I expect the price gap to get wider as the more overpriced Russell falls faster than the S&P. What’s the appropriate long-short ratio? Initial margins for MES and M2K are $1,000 and $550, respectively. Long 1 MES and Short 2 M2K would do the trick. Financial market is extremely volatile this year. Getting an information edge increases your odds of success in managing risk. I suggest leveraging real-time market data for a better gauge of market situation. TradingView users already have access to delayed data. A Pro user could upgrade to real-time CME market data for only $4 a month, a huge discount at the time of high inflation. Happy Trading. Disclaimers *Trade ideas cited above are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management under the market scenarios being discussed. They shall not be construed as investment recommendations or advice. Nor are they used to promote any specific products, or services.
CME_MINI:ES1!Short
by JimHuangChicago
25
Volatility in the DXY After US DataThe US dollar has been a bit volatile after US CPI and Retail Sales data. We initially rallied a bit, breaking through 113.38, but sharply retraced back to support in the mid 112's. We appear to be equilibrating in this range, continuing the sideways correction, we anticipated earlier this month. We are in a fairly wide range, with the lower bound at 111.37 and a high above at 114.54. We expect this range to continue as the markets equilibrate and find footing after this week's data.
TVC:DXY
by quantguy
Stocks React to CPI and Retail SalesStocks took a sharp dive after yet another hotter than expected CPI print. We tested 3500, then dip-buyers came in and we subsequently pivoted back to recover the 3600's. More momentum followed and we are currently testing our target highs at 3714. Stocks still look strong despite another flaccid data point in retail sales, which came in relatively weak. If we are able to break through highs, then 3810 is the next target. Otherwise, we can expect support at 3624.
FX:SPX500Short
by quantguy
Stocks rally despite high US inflationEUR/USD 🔼 GBP/USD 🔼 AUD/USD 🔽 USD/CAD 🔽 USD/JPY 🔼 XAU 🔽 WTI 🔼 Yesterday, the US Consumer Price Index data released had a 0.4% month-on-month increase and an 8.2% year-on-year increase, both higher than market estimates. Fear sentiment soon faded after an initial plunge in stocks, and a rally followed. All three major indices closed higher, with Dow Jones hitting a week-high at 11,056. Instead of witnessing a strong greenback upon prospects for more Federal Reserve rate hikes, USD/CAD peaked at 1.3964 yesterday and last traded at 1.375 with minor losses. USD/JPY reached 147.66, a 32-year high, to a closing price of 147.22. AUD/USD recovered from a 2-1/2-year low of 0.6170 and closed at 0.6298 with minor gains. The British Pound hit great strides as the market expects more U-turns regarding tax cuts mentioned in the proposed “mini-budget”. GBP/USD gained over 220 pips to 1.1329. EUR/USD hit a low of 0.9642, then bounced back to 0.9773. German Consumer Price Index had increased by 10% compared to last year. Gold price briefly slumped to $1,644 and back to $1,666.26 an ounce. Although crude-oil inventories increased by 9.88 million barrels, against market projections of 1.75 million, WTI oil futures still rose and stabilized at $89.11 a barrel.
by Mitrade_official
USD/JPY implied volatility rallies ahead of US inflation There are two tell tale signs that an important event is looming; realised volatility has died a quiet death whilst implied volatility has sprung alive. For all FX majors, 1-day implied volatility is currently higher than 1-week implied volatility, which means options traders estimate volatility over the next 24-hours to be greater than the next five days. Today is clearly all about the US inflation report, where another hot print is expected. Core CPI is expected to rise to 6.5% and match its 40-year high set in June, whilst CPI is expected to soften to 8.1% y/y – thanks to lower energy prices which OPEC are doing their best to support. With markets fully braced for another hot CPI – which will no doubt prompt a bullish response for the dollar if true, there is little talk of it missing expectations. And that could arguably prompt a more volatile response should it come in slightly softer. And speaking of volatility, implied vols for forex are screaming higher whilst USD/JPY trades within a miniscule range around its 24-year high. USD/JPY remains within a strong uptrend on the 1-hour chart, and trades within a tight consolidation just off its 24-year high. There’s been little in the way of jawboning from the MOF since prices broke above the previous intervention high, and the BOJ’s Kuroda has once again given a weak yen the thumbs-up – so long as its demise is not too volatile. A break above 147 confirms a bull-flag breakout and assumes trend continuation toward the 147..65 high – but given the historical significance of this level, it could prompt a shakeout has traders book profits or even fade the move. Should prices move initially lower then bulls could consider dips, but if CPI is to come in softer than expected then bears would likely drive this pair much lower.
Long
by CityIndex
2
It's Time for Everyones Favorite Show "Has Inflation Peaked?"Thank you Vanna! Show our contestants what they can win! Should you choose inflation has peaked, you stand to win an all expense paid short covering rally to 3900 ... *Crowd Cheers* Conversely, If you choose that inflation has not peaked, you'll win front row seats to the public execution of the global financial systems... *Crowd Goes Bananas* Choose Wisely! Not Financial Advice. Only a clock is guaranteed to be right 2 times in a day.
AMEX:SPY
by SPYvsGME
12