Market momentum is Red. Today, markets largely reacted to the blisteringly high CPI figure that showed consumer prices increased 1.3% month-over-month. While some institutions believe this could be the peak of inflation, there remains a wealth of problems with that thesis.
The Consumer Price Index surged by 8.7% year over year. In addition, consumer prices jumped a staggering 1.3% in June compared to May. No shortage of people exists calling this “peak” inflation. And, they might be right. But it doesn’t address the two bigger problems at hand.
First, inflation is red-hot on the back of the surging home and apartment rental prices, which hit their highest levels in decades. Moving forward, that figure will remain in place and dominate Americans’ costs of living, even while oil and gas prices pull back.
It’s important to note that oil and gas prices aren’t falling because of some smart public policy. Quite the opposite. Traders are worried about a recession, and prices had reflected those concerns since June 8, when the selloff began (and sector momentum turned highly negative).
During its July meeting, today’s big development is the sudden surge in expectations that the U.S. central bank will move interest rates up 100 basis points. In addition, markets now expect another 75 basis-point hike in September.
Analyzing Foreign Exchange
As rates increase and the dollar rises, large multinational companies have problems. They will face incredible costs repatriating foreign revenues back to the U.S. as they convert them to dollars. Smart companies may have hedged against the dollar’s recent surge, but Forex trading is not the faint of heart. These FOREX challenges will impact their global profits when most are revising profit expectations due to recession outlooks.
But the bigger problem happens at the global trade level. What happens to nations themselves that rely on the U.S. dollar for trade purposes. Most people worry that the U.S. dollar will collapse into a heap of dust due to weakness and hyperinflation.
The reality is that STRENGTH could do far more damage in the end. That’s because the dollar’s strength is building against many foreign currencies that must be exchanged to trade in American dollars. Think about the food trade. Think crude trade. When the dollar gets too expensive and attracts more and more investors into the currency, it can effectively swallow that other nation’s currency and create a sovereign wealth crisis.
This happened in Mexico in 1994 when the Federal Reserve hiked rates quickly and collapsed the Peso. Right now, Hong Kong’s peg to the dollar is facing incredible problems, and we could see a currency meltdown in that region quickly. I’m waiting for that shoe to drop.
Most developing nations also hold dollar-based debt. These nations will increase the amount of local currency to service this debt, fueling inflation in those regions. This is happening in Sri Lanka right now. As a result, some countries will choose between hyperinflation, a sovereign wealth crisis, or a potential economic depression.
Yes, I said the D-word. Stay tuned.
Is There Hope for Banking Sector?
Tomorrow, we’ll “officially” start earnings season with the earnings reports of JPMorgan Chase (JPM) and Morgan Stanley (MS). Unfortunately, as I write this, the financial sector remains in deeply negative momentum territory with little evidence of volume before earnings.
This will be one of the wildest earnings seasons on records. No one wants to take any steep position before earnings, and no one wants to speculate too much around options. We could see some very sharp moves, overreactions, and steep volatility on the back side.
I’m very interested in JPMorgan not only because it’s the largest U.S. bank by assets. But because its CEO is Jamie Dimon. I anticipate a few obvious statements about the economy’s direction and outright honesty about the probability of a recession. I expect Dimon won’t be coy about his outlook for the economy. That insight will help set the tone for the rest of the market.
JPM stock is now off 28.7% so far this year. Is the worst over?
[Editor’s Note: There’s another reason to like JPMorgan’s outlooks. Today, they explained that the energy sector is the best risk-reward sector moving forward. Its analyst was bullish on Antero Resources (AR) and Marathon Oil (MRO)]
With earnings season underway, I don’t need to speculate on one specific name. Instead, what I want to do is watch momentum itself in the financial sector. So I’m looking for the SPDR Financial Sector (XLF) to get back above its 50-day moving average to push the sector back into positive momentum. But, of course, that will require some patience.
When momentum is positive again in the banking sector, I’ll let you know and teach you how to trade leveraged ETFs for optimal gains.