Last Week's Close

E-mini S&P 500 Futures (September): Settled at 4153.50, down 58.75 on Friday and 83.00 on the week

E-mini Nasdaq-100 Futures (September): Settled at 14,035, down 121.25 on Friday and up 49.25 on the week

Broadly speaking, markets are still digesting last week’s activity, namely the Federal Reserve’s slight hawkish turn at their policy meeting and the impact of quadruple witching. U.S. benchmarks are rebounding from Friday’s late selling and divergence where Growth vastly outperformed Value. In fact, after Friday’s weakness, the Nasdaq clung to gains of 0.35% on the week, whereas the Dow lost a whopping 3.5% in its worst week since October. 

Logic would tell us that if the Fed turns hawkish, then rates rise and sectors such as Financials and Industrials should outperform. Last week defied that logic because the Federal Reserve caved to inflationary pressures after only 2 months of data, and the Bond market knows it. After revising inflation expectations to a hot 3.4% for all of 2021, from 2.4%, the yield curve has flattened significantly. The curve typically flattens when expectations for future inflation falls. Therefore, we must deduce that the Bond market is calling peak inflation. 

Friday started with added pressures across risk assets after St. Louis Fed President James Bullard, who sees a rate hike in 2022, spoke hawkishly on CNBC and added tailwinds to the U.S Dollar. Yet, the 30-Year Bond gained 0.76% on the session. Price action in the S&P sold into a gamma wall at 4160, just under 2 layers of our major 3-star support. The entire pocket of technical support from 4160 to 4180 buoyed the tape through the session, but it gave way into the close. 

The flush extended to a low of 4126.75 overnight, but the S&P rebounded by 1% ahead of the bell. The stage is now set, the Fed’s hawkish cards are on the table after their projections and Bullard, peak inflation is being priced in, and the quad witching flush was achieved. Where do we go from here?

We’re at the onset of another week with a pivotal economic calendar. The Treasury will auction 2-, 5-, and 7-Year Notes through midweek. Amid the flattening curve, whereas the yield on the 30-Year Bond lost 13 basis points last week, that of the 5-Year Note gained 13 basis points. This dynamic will certainly become a focal point. Tomorrow, Fed Chair Powell testifies before Congress. On Thursday, we look to final Q1 GDP, but more importantly, Friday brings the Core PCE Index, the Federal Reserve’s preferred inflation indicator.

Now, it isn’t all in the back half of the week, as Fed speakers are littered throughout. Today, we’re most eager to hear from NY Fed President John Williams at 2:00 p.m. CT. He leans on the dovish side and if the Fed were to continue playing the Jekyll and Hyde game we’ve detailed here before, it would make perfect sense for tables to be turned; now that Bullard, a 2022 voter, flushed out the hawkishness, the committee can stage more dovish rhetoric beginning with Williams today and followed by San Francisco Fed President Daly tomorrow.

Lastly, remember Fed Chair Jerome Powell stayed neutral to arguably dovish in his post-FOMC presser last week.

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