The beginning of the end for stimulus

“The Fed is always last to know” the saying goes. Fed officials (and central bankers around the world) have been dovish to say the least over the last year. More recently, as bond yields have been climbing, Fed members have been outspoken talking about how inflation is not a problem and that they are in no hurry to taper. But yields have been telling us different, as the 10 year-yield has risen from 0.5% to 1.33% since early fall 2020.

Source: Tradingview, FOREX.com

Commodity prices have also been rising, not to mention stocks markets making all-time highs along with Bitcoin.

Today’s data is now making its case that the Fed may be the “last to know”. Today’s PPI and Core PPI was much better than expected. PPI came in at 1.3% vs 0.4% expected and 0.3% in December and Core PPI (Ex-Food and Energy) came in at 1.2% vs 0.2% expected and 0.1% in December. The Producer Price Index has been rising since May 2020. The thought process is the PPI (PRODUCER Price Index) will feed through to CPI (Consumer Price Index), which will lead to general inflation. The CPI print for December was unchanged. The Fed will need to be on the lookout to see if the PPI feeds through to CPI. (The Fed tends to look at Core numbers because they feel energy and food prices are too volatile).

Retail Sales, Industrial Production and Manufacturing Production also came in better than expected. Retail Sales crushed expectations, coming in at 5.3% vs 1,1% expected and -1% in December. Ex-auto retail sales were even better, with a print of 5.9% vs 1% expected and -1.8% in December. One month’s print does not make a trend, but it appears people may have been out spending the $600/person stimulus check they got from the Trump administration.

For the most part, the US Dollar index has been range bound since early December between 89.20 and 91.25. January 6^th marked the low at 89.20 (coincidence that this was the day of the capitol riots??). Since then, price broke higher out of a descending wedge, moved in an orderly upward channel and posted a false breakout above horizontal resistance at 91.24. The target for the breakout of a descending wedge is a 100% retracement of the wedge, which would be near 94.30. However, nothing moves in a straight line, and the DXY moved lower below the bottom trendline and is now trying to regain the channel. The bottom upward sloping trendline of the channel acts as first resistance and crosses at 91.03. The next resistance is February 5^th spike highs at 91.60. Support for bulls is at yesterday’s lows of 90.11, then the January 6^th lows at 89.20.

Source: Tradingview, FOREX.com

There will be more Fed speakers this week and Fed Chairman Powell’s semi-annual congressional testimony next week. They may be likely to continue the mantra “lower for longer”, however, keep in mind that the ground work is being laid for inflation and inflation expectations (recall the Michigan 1 year inflation expectations component of the Michigan consumer sentiment index was 3.3% vs 3.0% last).

There is another saying besides the one about the Fed being the last to know: “The bond market is always the first to know”! Keep an eye on yields too.

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