Too Much Good News

The stock market took a sharp turn for the worse on economic data that raised the issue the Fed may yet raise interest rates at their next FOMC meeting in June as no less than three Fed President’s look for a rate hike coming up.

The Consumer Price Index (CPI) for April produced a headline surprise, with total CPI rising 0.4% month-over-month. This may have been a surprise for many but when you have seen crude oil prices surge as much as we’ve seen with the Fed’s central planning, inflation is going to jump as gasoline and everything dependent on it will be affected.

Also, industrial production proved to be a positive surprise as production increased at a faster than expected rate of 0.7%. Most of this is seasonal, as the utilities index spiked 5.8% as demand for electricity and natural gas returned to a more normal level after being suppressed by warmer-than-usual weather in March. Mining is still negative at a -2.3% and manufacturing at 0.3%.

In any case, the stock market didn’t like it after two regional Federal Reserve Bank presidents said Tuesday that the U.S. central bank could raise short-term interest rates at its meeting next month, despite low market expectations for such a move and uncertainty surrounding the referendum on the U.K.’s membership in the European Union.

Let’s not forget this is May and the focus with the Fed has now shifted to supporting the dollar now that income taxes have been collected.

Federal Reserve Bank of San Francisco President John Williams said it still “makes sense” for the central bank to raise short-term interest rates two or three times this year given continued moderate U.S. economic growth and low unemployment.

“I think that the data to my mind are lining up to make a good case for rate increases in the next few meetings, not just June, which means it’s very live in terms of that. “Currently my assumption is two, possibly three.”

Dallas Federal Reserve Bank President Robert Kaplan said on Tuesday that the U.S. economy is strong enough to justify an interest-rate hike in the “not too distant future,” but increases will be very gradual.

Inflation is “inching toward” the Fed’s 2-percent target, and while there is still slack in the U.S. labor market, 2-percent GDP growth this year will likely push unemployment below its current 5-percent level.

“We want to normalize rates,” Kaplan said. But given the headwinds globally, “There’s a limit to how fast we can do it.”

When you have 3 Fed presidents talking about raising interest rates (June FOMC) the markets listen closely to what the Fed is trying to tell us.

Politics Play Into Technical Picture

I expressed to you a month ago the Fed would start to support the US dollar, which means take the pressure off of the Euro, especially at a time when the Brits are trying to decide whether to keep the shackles of EU socialism around them. This government wants Britain to stay with the new world order/EU socialism program and crushing the Euro right before this key election may help to create demand for EU goods.

Furthermore, the Senate on Tuesday approved legislation that would allow victims of the 9/11 terror attacks to sue Saudi Arabia, defying vocal opposition from the White House. The legislation will now head to the House, where lawmakers have also introduced their own version of the bill.

Saudi Arabia’s foreign minister, Adel al-Jubeir, pushed back against the reports in Geneva earlier this month while warning that the legislation could impact Saudi investments, according to Reuters. Most of their assets are in US equities, so this should be interesting.

After today’s sharp sell off the S&P 500 index is now testing the neckline of what looks like a developing “head-and shoulders formation with support at 2,039!

A break below this level would trigger further sell stops and with today’s news the bulls are going to have a hard time defending this, especially with today’s threat of raising interest rates in June, Brexit in June and now some 15 years later looking to hold Saudi Arabia accountable. There is certainly change in the air.