The Fed Has a Problem

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The US CPI numbers were more or less in line with expectations, that was a relief and markets rallied yesterday. If there is less inflation bond yields fall, stocks and gold rally. There was also a big jump in commodity prices despite the fact that the Fed will taper the amount of stimulus.

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After the publication of the FOMC statement market participants assumed that tapering would begin before the end of this year. Well, we are near the end of the year, therefore tapering is imminent. This is normally bearish for commodity prices and stocks. As these markets are rallying this suggests the bad news is priced in, if investors all agree tapering is coming they have already sold, now they are thinking about the next move.

If tapering occurs at a time when the economy is struggling to recover (as we have seen with the latest nonfarm payrolls), tapering could stall the economic recovery. In this case the Fed would re-start the stimulus program, that is the next move. This action would be bearish dollar and yields and bullish stocks, gold, commodities and inflation.

You will note that yesterday we had this exact scenario, dollar and yields went down, stocks, gold and commodities went up. The problems for stocks is that inflation would go up so the positive influence from the stimulus would be offset by the negative influence from high inflation.

 

 

 

The Elliott wave model predicts that stock market will go down even if the Fed re-start the stimulus program. The problem caused by inflation would be too much, soaring commodity and energy prices would hit companies’ profits at a time when valuations are at record highs. This is why stock markets are struggling to go higher, the FTSE 100 is no way near its all time high. The pattern since 2020 low is a rising wedge [A,B,C,D,E] which is a bearish pattern, we are near the end of wave E.

Thierry Laduguie is Market Analyst at www.e-yield.com

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