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Dollar and S&P 500 Wind Up Despite Financial Warnings but CPI Ahead

Dollar and S&P 500 Wind Up Despite Financial Warnings but CPI Ahead

John Kicklighter, Chief Strategist

S&P 500, Dollar, USDJPY, CPI and Earnings Talking Points:

  • The Market Perspective: USDJPY Bearish Below 141.50; Gold Bearish Below 1,680
  • The S&P 500 registered its smallest trading day since Sept 12th but it was nevertheless a 6 consecutive session slide and the lowest close since November 2020
  • Contraction in risk assets is mirrored for the US Dollar with one of the most abrupt downshifts in volatility or the Greenback of the year…before the US CPI release

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The S&P 500 Readies for Volatility While the USDJPY Tempts It

We have absorbed some very unflattering fundamental event risk these past few trading sessions, but the bearish progress registered by the key ‘risk’ measures has been noticeably lax. Is that supposed to be taken as a sign that the markets are properly adjusted to the unfavorable elements of the backdrop or have we strayed into territory where the markets have diverged from the assumptions of value? I believe our situation strays more towards the latter scenario with the markets sweating off a near-decade build up of support for questionable speculative positions. As an assessment of the balance for ‘risk’ this past session, we need to look no further than the S&P 500. My preferred measure of an ‘imperfect’ gauge of confidence extended a sixth consecutive session of slide – matching the longest slide in two weeks with history back to the height of the pandemic in February 2020 with lows not seen since November 2020. On the other hand, the progress to ‘achieve’ the retreat is extremely tepid on the smallest daily range since September 12th. So, is this a move of conviction or happenstance. The answer to that question can render very different views as to what happens next.

Chart of S&P 500 with 100-Day SMA, Volume and Consecutive Candle Count (Daily)

image1.png

Chart Created on Tradingview Platform

When it comes to ‘risk’ benchmarks, the sense of reticence is fairly broad in its reach; but there are exceptions. One such alternative-to-the-rule is the progress registered by USDJPY. The advance from the carry-backed exchange rate is not at all unfamiliar. The Wednesday advance was the sixth consecutive session in which the pair has advanced on a close-over-close basis. Given the current and forecasted carry differential from this pair, the drive is not a surprise. That said, the defiance of artificial pressures is remarkable. If we were operating purely on interest rate or growth differentials, the exchange rate’s gains would not be that remarkable. Yet, there are external factors at play when it comes to this exchange rate. In particular, the advance above the 146-mark is a clear defiance of Japanese policymakers intervention efforts to keep the Japanese Yen from depreciating beyond a certain lever. The September 22nd intervention occurred below the 146 level, but we now find the exchange rate above that high water mark. Does that mean another round of MOF/BOJ action is on tap? Not necessarily. Monetary policy manipulation is as much a game of finesse as it is math. That said, we should actively be keeping score.

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Chart of USDJPY with 100-Day SMA and 1-Day Rate of Change (Daily)

image2.png

Chart Created on Tradingview Platform

Consolidation Has Also Taken the Dollar with CPI as Possible Trigger

The S&P 500 and ‘risk’ leaning assets are the only measures struggling for clarity. The Dollar is another benchmark that seems to be groping for its role in the broader financial system. The ‘Greenback’ plays the role of carry potential, growth benefactor and ultimate safe haven with a shifting backdrop on those characters. Which factor is taking the lead with the most recent upswing is open to interpretation, but the fact that we are only ‘inches’ from fresh two-decade highs from the DXY Dollar Index cannot be simply dismissed. When it comes to the Dollar’ standing, the DXY Index is still below the highs of earlier this month, but the fundamental motivations are fairly transparent. What’s more, the sensitivity to fundamental charge is making itself evidence. If you compare the last three trading days’ range to that of the activity registered over the past two weeks (10 trading days), we are left with a signal that conditions are ‘too quiet’ rarely seen in 2022. That translate to a volatility risk going forward for which we should take account.

Chart of DXY Dollar Index with 50-Day SMA and 3-Day to 10-Day ATR Ratio (Daily)

image3.png

Chart Created by John Kicklighter with Data from BLS and ADP

If you are looking for a scheduled catalyst for the transition from control volatility to productive market actions, there seems little need to look beyond the top event risk for the coming session: US consumer inflation. The September CPI is going to be a closely observed economic release from the world’s largest economy. There has been some settling in headline inflation, but we are very far from the 2.0 percent target that the Fed has laid out for inflation for the US consumer. Given the market’s complacency lately around this principal fundamental theme, I remain wary of the short-term impact of an update that ‘beats’, ‘misses’ or ‘meats’ expectations. If you are looking for the short-term and immediate impact, consult the headline CPI. Otherwise, the so-called core figure will likely do more to direct trends.

Chart of US Consumer and Core Consumer Inflation (Monthly)

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Chart Created by John Kicklighter with Data from the BLS

Recessions and Top Event Risk

This past session’s restrained range for the likes of the S&P 500 belies the critical fundamental developments on the day. The IMF’s update on economic forecast and financial stability was more than enough to foster some level of concern, but the unflattering statistics seemed to generate rather little in the way of concern. According to the World Economic Outlook (WEO) from the group, the outlook for the world’s economy was steady at a suppressed 3.2 percent pace of expansion in 2022 with a further downgrade in 2023 to 2.7 percent. The group warned ‘the worst is yet to come’ for the world, the market seemed to embrace the aloof view. That is unlikely to last for long as the ‘official’ data prints with a skew towards contraction.

IMF Growth Forecasts from October World Economic Outlook

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Table from IMF Interim WEO

Reigning in the views of the big picture and over the ‘long-term’, there is plenty over the immediate future that will charge volatility in the short-term. The US CPI for September is arguably the most charged scheduled event risk on tap. The previous inflation report generated an inordinate amount of volatility from the market. Aside from this particular road towards recession risks, I will also be watching the IMF Director’s global agenda briefing, a discussion on the global economy among key players, US initial jobless claims and some early earnings reports. All of this factors into the big-picture fundamental picture, but the collective view of what lies ahead should not be anchored to any individual update.

Critical Macro Event Risk on Global Economic Calendar for the Next 48 Hours

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Calendar Created by John Kicklighter

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