Introduction
This week ends with the market holding an uncomfortable position: equities at all-time highs, oil above $100, inflation at a three-year peak, and a brand new Fed chair taking his seat under extraordinary political pressure. Something has to give.
Global Macro
This week saw all the attention shift to U.S. markets, as new inflation data came in. Even though expectations for this reading were much higher compared to April’s data, the numbers still came in hotter than expected. On Tuesday, the headline CPI data came in at a whopping 3.8%. This same metric was at 2.4% just two months ago, and is now well over the 2% long-term target the Fed maintains.
Month-over-Month U.S. CPI expressed as a percentage change compared to the month prior
On top of that, PPI came in at an even higher 6% YoY. Since PPI shows inflation for producers, we know that these costs are likely to be passed onto consumers in the near future, indicating that inflation may quickly rise even sharper.
Year-over-Year U.S. PPI expressed as a percentage change compared to the year prior.
We haven’t seen rises in inflation so quick and steep since 2022, when the Fed was soon after forced to hike 500 bps, after mistakenly seeing inflation as transitory. However, this time the spike is happening at an arguably much worse point in time. Rates are already relatively high, combined with a relatively weak economy. Furthermore, the U.S. Senate approved Warsh as the next new Fed chair.
Being elected for the job by Trump himself, he is strongly expected to lower rates, right at a time where the Fed is being forced to start hiking rates, especially if this rate of change were to continue. Expect the June 17th FOMC Meeting to be extra important, as markets are unable to figure out what Warsh will actually do.
Equities
Equities somehow completely shrugged off the inflation news. Common sense would tell us that the market should tank, and yet AI leadership has just kept on dragging the Nasdaq and S&P 500 up with it.
Nasdaq 100 on the Daily Timeframe
In the timespan of just 6 weeks, the Nasdaq is up a whopping 30%. What makes this performance even crazier, is the fact that it happened right as the economy which it tracks is caught up in a major war in the Middle East, and as rate cuts this year are now completely priced out. Due to the fact that we are in uncharted territory, it’s very hard (if not almost impossible) to perform any clear Technical Analysis here. All we can observe is to continue following the trend until it breaks.
Forex
While the equity move baffles investors and traders alike, the FX market is responding more conventionally to the inflationary surge. Following Tuesday’s news, the Dollar has been down every day, and is now testing a key area of old highs.
EUR/USD on the Daily Timeframe
Technically, this is an extremely strong level, it has served as very clear S/R from both sides, and has not been tested since the breakout in early April. And yet, the question of whether this level will hold is hard to answer. Despite the strong level, the momentum of the underlying news may completely negate its validity, especially as the market currently seems to not be reacting to these old highs.
Commodities
Even though Oil seems relatively flat and rangebound, it is putting in a dangerous combination of Higher Highs and Higher Lows.
Oil on the Daily Timeframe
Our momentum indicator (which is a combination of Moving Averages) is also still resolutely pointing up. Combined with the fact that the Strait of Hormuz continues to be closed, this does warrant a slight bullish bias for Oil. Whether a further increase in energy prices would put a halt to the equities rally, is a question which is yet to be answered.
Conclusion
One-sentence summary of the week:
Equities Casually Brush Off the Biggest Inflation Increase Since 2022