The CPI data came in hotter than expected, catching the markets by surprise and proving that peak inflation was not in March. The S&P 500 plunged 2.9% to close at 3,900.
It was worse for the NASDAQ 100 Invesco QQQ Trust (NASDAQ:QQQ), dropping 3.53% to close at $288.84. But the most significant moves came across the yield curve, with the 2-year rate jumping by 25 bps to finish the day at 3.06%.
The dollar was also stronger, with the index rising by 85 bps to close at 104.82.
1. Interest Rate Hikes And Fed Funds Rate - How High Is Enough?
The move in the markets was a massive repricing as investors now need to rethink how much more the Fed will need to raise rates before everything is said and done.
The problem is that I don’t think anyone knows how far rates will need to rise. We haven’t been in this situation in a very long time.
Looking through the lens of time, we see that from the 1950s until early the 2000s, the Fed typically kept the effective fund’s rate above the inflation rate.
It wasn’t until the 2008 recession that Fed policy became consistently ultra-easy. But if history is any guide here and inflation rates do not stop rising, the fed funds rate will start heading much higher.
For now, the Fed funds futures expect rates to top out around 3.65%, which would barely put a dent in that spread with the current inflation rate. So, either interest rates will have to go significantly higher, or the Fed better hope that inflation starts coming down.
Of course, all of this creates tremendous short- and long-term uncertainty. The most apparent risk is what the Fed says on Wednesday and its projections for hiking.
As I mentioned on Thursday, the market has been too complacent about the Fed meeting and the risks of the CPI report. Even after the CPI report, the market seems too complacent.
2. Volatility
The VIX index rose on Friday but closed off its highs at 27.75. Additionally, the VVIX, which measures VIX volatility, remains extremely low at 99.75 and below the norms of the last two years.
I think that complacency will be resolved this week, either before the Fed or after the Fed. Based on how the current patterns have been playing out in the market, it seems possible that we will see a new low at some point this week.
Each of these big rallies has resulted in the market giving back all of the gains and then some. Additionally, the options cycle appears to have kicked in.
Generally speaking, once that trend has started, it continues until options expire. This could be similar to what we saw heading into May options expiration, with a counter-trend move after OPEX.
Additionally, the FOMC cycle of post-FOMC minute sell-offs and post-FOMC meeting rallies may have reversed. If that has changed, any post-OPEX rally will be very short-lived until we get to the Fed minutes in July.
3. S&P 500
A break of technical support at 3,860 is likely to result in a retest of the lows around 3,810, while a break of 3,810 probably leads to a further drop to around 3,720. I know it sounds like a lot, but it is about 4.5%, and given how much we sold off just on Thursday and Friday, it seems possible.
4. Apple
Apple (NASDAQ:AAPL) is probably one of those stocks you need to watch because it closed Friday on technical support at around $137.
That is the price that needs to be watched. That price will tell us a lot about where the market is going. If that price doesn’t hold, Apple has no real support until $123, which is nearly 10.6% lower.
5. Adobe
Adobe Systems (NASDAQ:ADBE) fell sharply last week following the DocuSign (NASDAQ:DOCU) results. Now it is Adobe’s turn to report results this week.
The technical setup for Adobe doesn’t look favorable. The RSI is negative, and the trading channel is negative. The $390 region has held strong because that had been the pre-pandemic highs. But the trading channel suggests we could see the $330’s.
6. General Electric
General Electric (NYSE:GE) keeps looking worse and worse, and it seems like the stock wants to fill that gap created in November of 2020 at around $64.
7. Micron
Micron Technology (NASDAQ:MU) didn’t take long to fall through technical support at $65.20. With slumping DRAM prices, I’m surprised it took this long for the stock to break down.
The $58 continues to act as a magnet dragging this stock lower.
8. Roblox
Finally, I had seen bullish options betting on Roblox (NYSE:RBLX), but since I noted it, the stock has fallen sharply with the rest of the market. The company should post its May metric this week, as it usually posts its monthly metric in the middle of the quarter.
I will have to wait and see how that data is.
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