Powell’s Gambit
Is the Fed Playing 3-Dimensional Chess?
On Wednesday during a semi-annual address to House representatives, Fed Chairman Jerome Powell reiterated his commitment toward the Fed’s long-stated 2% inflation target. He also conceded the fact that they are still far away from meeting that goal.
At the same token, Powell offered some dovish sentiments such as the need to moderate the pace of interest rate hikes. He acknowledged that the process can be painful and slow.
Last week we talked about the potential effects on markets as a follow-on from these hearings. Sure enough, the US dollar weakness continued and the S&P500 pulled back from our channel resistance.
For now, Powell seems comfortable that the Fed remains on the right path, but don’t get it wrong – they are walking a VERYthin line.
Too hawkish = more rate hikes = recession
Too dovish = overheated economy = runaway inflation
There’s no red flags on the horizon from a macro perspective for this rally. What we’re seeing is an overdue consolidation on stocks while the uptrend is not in danger of breaking down. We’ll continue to monitor the situation and play this level to level.
Later on we’ll review the charts so stay tuned!
Economic Calendar
Highlights
- Durable Goods Orders – Tuesday
- Q1 GDP Final Estimate – Thursday
- Core PCE + Personal Income & Spending – Friday
Data Preview & Commentary
Durable goods are expected to contract, while maintaining the sideways range. This isn’t likely to be a big market mover unless it’s either a big beat or a big miss. A beat could cause some strength on the US dollar and weakness in equities/crypto.
US Q1 GDP is expected to hold at the prior estimate. A surprise upward revision could boost the dollar and put pressure on risk assets, while a sharp downward revision could have the opposite effect. Again look for a big beat or miss, otherwise it’s not likely to be a huge market mover.
Main Event
This week’s core PCE deflator data could throw a damper on the Federal Reserve’s intention for another two rate hikes before EOY. Although the committee decided to pause at this month’s meeting, its overall consensus was that the inflation risk remains skewed to the upside. As such, they put the market on notice to prepare for a terminal rate of 5.6%. Few were expecting such a strong hawkish sentiment.
Core PCE deflator figures for April showed headline inflation ticked up from 4.6% to 4.7%, while the deflator itself edged up to 4.4% from 4.2%, which in part explains the ongoing Fed caution. Friday’s Core PCE and personal income & spending numbers should offer markets a little more clarity as to how valid these concerns are are and whether or not the Fed’s hawkishness is warranted or overblown.
May’s Core PCE (YoY) is expected expected to remain unchanged from the prior month, while the deflator is projected to show a decrease from 4.4% to 4.1%. This should be enough for rate hike expectations to cool off somewhat. However, an unexpected beat would reinforce the likelihood of a hike at the July meeting.
Currently that probability stands at 72%.
Market Effects
This is the part where we review the charts and latest developments in PA and formulate a plan for the upcoming week. So let’s dive in!
US Dollar Index
So far 103 resistance is being respected well, and we’re getting our retrace toward 102.7 support. Should that retest hold, I’d expect an eventual continuation higher toward 103.8-104.23 range. This would be challenging for risk assets and we’d likely see some continued short-term weakness on stock indices and a pullback on BTC. A close back below 102.4 could trigger a lot more downside toward 101.5, 100.85.
S&P500 Index
We got our perfect rejection off the top channel line resistance, and are now consolidating toward the lower end. First support is 4310.73 and that would be quite a bullish retrace. Lower channel support comes in at 4270.
A wick down to fill the 4230 gap shouldn’t be ruled out either. Once our higher low is set, we should carry on toward 4500. A close below channel support would suggest a more risk-averse approach.
Bitcoin
The star of the show.
Last week we spotted a bullish candle setup at channel support on the daily chart, which gave us some confidence on a local low and potential move up. We were also on the lookout for a potential OBV breakout which took place shortly after. In typical dramatic fashion BTC outperformed expectations and went all the way up to our range high dating back to mid-April.
We saw an initial rejection there, but bulls reclaimed the value area high around 30500 and we saw a new round of FOMO with price pushing off to 31400. The clean break through 28k did not offer much in the way of a retest, and I’m on the lookout for a potential revisit at some point. This whole move has been news-driven and we aren’t exactly seeing strong participation from Ethereum and altcoins. That makes me cautious that we’ll retrace in the near future. It’s wise to get a little cautious here imo.
Having said that, I’m 100% looking to load the dips! For now we have an intraday higher low at 29500, and bulls remain in control above that pivot.
In The Birb Nest Discord we’ve also been slinging trades on blockchain stocks $MARA and $RIOT with some pretty good success. We’ve also started sharing some alpha DeFi plays. Check us out sometime!
That’s all for today. Have a great weekend!
Jay Charles
Editor in Chief, The Trading Tank.
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