1. Powell takes the helm
It is new Federal Reserve Chair Jerome Powell’s first real opportunity to steer the ship in the semi-annual congressional testimony. He first addresses the Senate Banking Committee on Tuesday at 9:00 am Central and then the House Financial Services Committee on Thursday at the same time. Speculation on the path of interest rates hikes have led to fickle market conditions. While some analysts now project a path of four hikes this year, we expect no more than three. In recent years, market participants have fought for every foreseeable advantage and this has led to volatility during these hearings; even on no news. As Chair Powell gets his sea legs under him, we expect no different this week. We remain long-term doollar bears due to our belief that the Fed will hike no more than three times this year while market conditions have priced in little to no action from other central banks. The path of inflation will be a key topic this week and we are sure to hear questions regarding Powell’s belief on whether hiking too quickly will stop inflation in its tracks and his opinion on allowing inflation to run hot. Lastly, we find it encouraging that the speculative net-long position in the Euro (net weight of 57.6% in the Dollar Index) has decreased from 2.5:1 to 1.55:1 in just three weeks.
2. S&P Bull Flag
The S&P gained 1.4% on Friday, half of which was incurred in a late session melt-up. Midweek last week we reintroduced our Bullish Bias but cautioned against continued volatility. We began the discussion on early Wednesday citing two key factors. First, “the number of analysts and traders calling for a retest to 2530 makes this improbable”. Second, “maybe most importantly, there is a potential bull flag building; if we see marginally lower lows and marginally lower highs over the next few sessions, this could be a very bullish setup”. Both of which played out as the week developed. The number of analysts calling for a retest of the double bottomed low continued to pile up; a third test makes absolutely zero sense. Additionally, Thursday’s new low on the week (Wednesdayevening) followed by Friday’s melt-up all but secures the bull flag. Now lets layer in the end of the month this week; JP Morgan said early Friday morning that they expect strong end-of-month equity buying. This makes a lot of sense given the type of value relative to where we were in January and where we could be by the end of the quarter in March. There are two headwinds; first, major three-star resistance at 2754.75-2763 and second, Tuesday’s Consumer Confidence read; one that has been known to fuel buying. Some may argue that the lack of volume on Friday reduces the session’s credibility. Friday was the lowest volume session in the E-mini S&P 500 since Jan. 22. However, January 22nd gained 0.8% and went on to gain another 1.5% over the next five sessions before hitting the all-time high of 2878.50. Lastly, the 10-year Treasury yield has retreated from Wednesday’s post-FOMC Minutes high and we expect this to remain subdued ahead of Thursday’s PCE Inflation read. In conclusion, the door is open to see a test towards 2800 not only this week but as early as Wednesday.
3. Inflation Data
The Federal Reserve’s preferred inflation indicator, the PCE Index, is due out Thursday morning. We will have some solid groundwork to interpret this read due to Fed Chair Powell’s testimony on Tuesday. This read comes out at 7:30 am Central on Thursday, just before round two of his testimony. Upon the release of the FOMC Minutes, the 10-year Treasury yield spiked to a high of 2.957. However, the 10-year Treasury future never made a new low at this time. It traded to 120’02, just higher than on Feb. 15 when it was at 120’01, and this has provided technical fuel to buyers. We have a rare major four-star support level at 119’20-120’00 which has held strong. This level also aligns with 3% and brings an extremely significant technical floor for prices and ceiling for yields. In February 2017, YoY PCE reached a peak of 1.8% before trending lower. The read has bottomed out from 1.3% to regain 1.5% for the last two months. The expectation is again 1.5%, however, MoM is expected at 0.3% which would be the highest since January 2017. Thursday’s read will be pivotal, not only in how the Treasury market reacts but also because it is likely to come up in Powell’s testimony only an hour and a half later. It is important to note that Eurozone CPI is due out ahead of this on Wednesday at 4:00 am Central.