The Markets Fell To Key Technical Levels

The Fed released the latest Beige Book, which contained the following comments describing inflation:

Inflationary pressures remained strong since the last report, with firms continuing to pass swiftly rising input costs through to customers…. Strong demand generally allowed firms to pass through input cost increases to customers, for example, via fuel surcharges for freight and airline fares.

This is the type of news that makes the Fed pay attention. When firms have the ability to pass through higher prices, central bankers take note. However, they noted:

However, contacts in a few Districts noted negative sales impacts from rising prices.

This is the first time negative comments like this have appeared in the Book. This may spark the beginning of a negative price feedback loop, which would be a welcome development.

Here is the description of overall, macroeconomic activity:

Consumer spending accelerated among retail and non-financial service firms, as COVID-19 cases tapered across the country. Manufacturing activity was solid overall across most Districts, but supply chain backlogs, labor market tightness, and elevated input costs continued to pose challenges on firms’ abilities to meet demand. Vehicle sales remained largely constrained by low inventories. Commercial real estate activity accelerated modestly as office occupancy and retail activity increased. Districts’ contacts reported continued strong demand for residential real estate but limited supply.

Regarding expectations, the Book commented:

Outlooks for future growth were clouded by the uncertainty created by recent geopolitical developments and rising prices.

As with the negative price feedback loop, this is the first time expectations have been “clouded.”

Fed Chair Powell is on board for a 50 basis point hike at the next meeting:

Federal Reserve Chair Jerome Powell blessed a half-point interest-rate hike next month and signaled support for further aggressive tightening to curb inflation by noting that he saw merit in “front-end loading” policy moves.

“I would say that 50 basis points will be on the table for the May meeting,” Powell told an IMF-hosted panel on Thursday in Washington that he shared with European Central Bank President Christine Lagarde and other officials. “We really are committed to using our tools to get 2% inflation back,” he said, referring to the Fed’s target for annual price increases.

I believe he’s the fourth Fed President to support this move.

The yield curve has flattened substantially since the end of last year:

At the end of last year, the yield curve was a classic curve with long rates continually higher.

Now, starting at the 2-year, the curve is nearly straight.

Let’s take a look at two sets of charts.

This is a classic sell-off pattern, with prices moving from the northwest to the southeast. Prices kept moving lower throughout the day, ending near a session low.

Prices have now returned to key technical levels. The SPY is at the 200d-ay EMA; the QQQ and IWM are both at key support levels.

I’ll be back over the weekend with a weekly summation.