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A Lack of Control Over Inflation Appears To Be Taking Hold

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3/21/24

#Stocks – $XLE, $XME

#Macro – $SPX, #rates, $DXY

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Since the beginning of March, the S&P 500 has been undergoing a nice consolidation, which passed between yesterday and today. However, the index did manage to hit the upper trend line, which has been respected since February 12.

It also trades one full bar above the upper Bollinger band, which hasn’t happened often during this rally, and is generally in an overbought condition. By the looks of the chart, I can’t see any other time that has happened going back to October. It is merely an observation and not predictive of anything, but again, I would think it serves as an overbought indication.

The dollar was also very strong today, especially against the Swiss franc and the British pound. So, yet again, the dollar index is approaching that resistance level at 104.25, which has been very difficult to breach. One would think that given the stronger US data, the move to cut rates by the Swiss National Bank, and the Bank of England’s dovish tone, the dollar would break out and push higher. But we have to wait to see what develops here.

The Nikkei has rallied aggressively following the BOJ’s decision to raise rates and end yield curve control. That is mainly because the yen has weakened because the BOJ gave no clarity as to when it would consider raising rates again.

So this week had four central banks, all with reasonably timid policies and stances, and it strikes me as odd. Most notably that of the Fed, where the market is saying that the Fed’s view on inflation is wrong. We are now at the highest level on the 5-year inflation breakeven in a year.

The chart shows that the 5-year inflation break-even trend has been steadily rising since mid-December, around the time of that FOMC meeting. One would think that if the policy were indeed as restrictive as the Fed believes, this would not happen.

So, it’s no wonder the XLE is hitting resistance for the fifth time since June 2022. If the Fed is going to let inflation run hot and the market suggests inflation is going higher, then it would make sense for energy prices to go higher and the energy sector to go higher as well.

It might even make sense for the metals and mining sector to go higher because many other precious metals besides gold have yet to move.

Anyway, that’s all for today.

Mike

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