Yesterday we looked at this chart of the Nasdaq.
As we discussed, the Nasdaq put in a technical reversal signal on the day of the CPI report (July 11th). That started an aggressive convergence in the stock market — closing the performance gap between a handful of big tech companies and the rest of the stock market.
And as we also discussed, the trend line in this chart has significance. It represents the trend from the October lows, which was marked by the Fed's signaling that the tightening cycle was over.
There's a similar line in the S&P futures. It bounced from there today, which was good for 100 S&P points (a 1.8% bounce intraday). But it didn't last.
We'll head into tomorrow's PCE number with the S&P sitting on this big trendline (from the October lows), and the Nasdaq isn't far from it.
On that note, as we also discussed yesterday, what we're seeing in the behavior of stocks has everything to do the events of next Wednesday.
The Fed will meet on Wednesday, having held real rates at what are historically very restrictive levels for a full year.
The result: 1) A rate-of-change in the rise of unemployment that is consistent with past recessions (and past Fed easing cycles), and 2) the first monthly decline in prices (CPI) since May of 2020 (the depths of the pandemic lockdown and deep economic contraction).
Add to this, the Fed's target for measuring inflation is PCE, and tomorrow's report will show that the previous report's number has been revised down to a negative monthly change in prices. And after tomorrow's report, we should find PCE under 2.5%. And the Fed has told us, many times, that they will start cutting "well before two percent." As Powell has said, if they wait for two percent, "it would be too late" (they risk inducing deflation).
So, the Fed is running short on excuses for keeping rates overly tight.
Keep in mind, every other major central bank has already started the easing cycle except the Bank of England, which is expected to start next week.
The easing cycle, of course, also excludes the Bank of Japan. And on that note, perhaps the most persuasive nudge the Fed is getting to start moving on the easing cycle, will also come next week.
The Bank of Japan will conclude its meeting Tuesday night (EST). And they will lay out the plan to "begin the end" of quantitative easing.
They've already ended negative interest rates. They've already ended ETF purchases (exchange traded funds). They've already ended yield curve control. This is all freshly printed yen that has found its way into foreign asset markets (like Western world government bond and stock markets) for the better part of the past decade.
That global liquidity spigot is closing.
And that's visible in this chart (the white box) …
This is the chart of the dollar/yen exchange rate in purple. And the Nasdaq is in orange.
As you can see the two have tracked closely, and it's not coincidence.
This reflects the "carry trade" — the borrowing of yen for (effectively) free, converting that yen to dollars (USDJPY goes up), and investing those dollars in the highest quality dollar-denominated assets (U.S. Treasuries and the big tech oligopoly stocks).
As you can see in the chart above, with the Bank of Japan telegraphing the beginning of the end of QE (a plan to taper), this trade is reversing.
And with that, the risk rises of global liquidity swinging in the direction of too tight (i.e. a liquidity shock). The question is, will the Fed surprise markets next week with a move, or will the market have to force the Fed's hand.
