Bullish Momentum Persists: Rate Cut Lock, NQ Surge, and Seasonal Trends

PPI at 8:30AM ET

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Our View

I read that traders are predicting a 100% probability of a 0.25% rate cut. The rate cut has been a lock for weeks. The ES is up 28% year-to-date, putting the index on pace for back-to-back annual gains of over 20% for the first time since a four-year stretch that ended in 1998. I have seen some big rallies but I can’t remember anything like this. Helping to push stocks higher is the 10-year note yield, which settled at 4.219%.

In my opinion, the upcoming PPI report will likely be a non-event. However, we are entering a period of seasonal weakness, and it’s clear to see that the bulls remain fearless.

The money train is still buying pullbacks, especially the 25-40 point drops. The way it looks to me is the ES is in a 40-point back-and-fill. I’m going with the PitBull rule about looking for a low the Thursday before the December expiration.

MiM and Daily Recap

The ES traded within a tight 10-point range during the Globex session, from 6045.50 to 6054.75, never testing the prior day’s low. The CPI numbers came in generally as expected, and after an initial 8:30 a.m. print of 6050, it was up and away. This set up a gap-and-go open at 6075.50, followed by a steady 45-minute rally to 6090.25 by 10:14 a.m.

A brief 15-minute pullback to 6082.25 provided the next half-hour trading range. The range low was tested and re-tested around 11:10 a.m., which provided the start of the next wave higher. This rally trended up to the day’s high of 6102.50, printed at 1:02 p.m. This was followed by a bit of a pause as the ES and NQ pulled back a little over the next hour.

Some sideways and upward action heading into the imbalances set up a little more selling as the 3:50 p.m. MIM showed only $290 million to buy, which flipped to $515 million to sell in the 3:55 p.m. update, dropping the ES from 6096.50 to 6087 just after the cash close. The session ended with a final settle at 6087.25, up 41 points (+0.68%). The NQ closed at 21,755.75, up 350.50 points (+1.64%), marking a new all-time closing high. The markets sustained their volume, trading 2.3M contracts in the ES, while the NQ traded 534K contracts.

In the end, it was all about the CPI number coming in as expected with rotation back into the NQ and ES, while the Russel and Dow showed relative weakness.

There was a typo in yesterday’s lean. It stated, “I know the markets have been bullish,” but it should have been bearish. No matter what, the Fed doesn’t want the markets down.

Both the ES and NQ performed well during most of the session, even as the ES closed lower for the fourth day in a row. In terms of tone, both indices acted firm until the late-day weakness.

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Inflation is Now Structural

The inflation surge that kicked off in 2021 can be traced back to a perfect storm of supply chain disruptions and unprecedented fiscal and monetary policy interventions. The global economy was hit by supply chain bottlenecks, from shipping delays to semiconductor shortages, which limited the availability of goods. Concurrently, governments and central banks worldwide unleashed a flood of both monetary and fiscal stimulus to counteract economic downturns caused by the global shutdown.

This resulted in an economy wherein there was “too much money, chasing too few goods,” a classic recipe for inflation. Prices skyrocketed as demand outstripped supply, leading to the inflation we have all experienced.

What is Structural Inflation?

Structural inflation is a situation wherein consistent price increases become embedded within the very fabric of an economy. They are not a simple temporary spike due to transient factors but rather … a persistent and constant feature. It occurs when changes in the economic structure, like shifts in labor markets, demographic changes, or long-term supply constraints, lead to a higher baseline level of inflation. Unlike cyclical inflation, which might rise and fall with business cycles, structural inflation suggests a new normal where inflation rates remain elevated even after initial shocks have passed.

Has inflation subsided from the print highs of 2022? Yes.

The initial causes of inflation subsiding – supply chains have mostly recovered, and stimulus measures have been tapered.

But it is no longer 2021. We are a few days away from 2025, four years later.

Inflation has not returned to pre-2021 levels. Instead, we’re seeing year-over-year inflation prints well above historical norms. So we are discussing inflation that has occurred within the last 12 months. Not taming what occurred almost four years ago. Remember 1977?

We are not illustrating this chart to ‘predict we will soon experience a 1978 to 1980 repeat in inflation’. Such a stance would contradict the proper thesis of the Lucas Critique and be subject to the whims of Apophenia; and we have no interest in doing this.

Rather, it should highlight that simply because we have experienced the year over year inflation prints subsiding from their highs in 2022 … history shows us that ‘secondary flare-ups’ and persistent, structural inflation can occur after such periods of ‘cooling’ of initial inflationary shocks.

The Evidence of Structural Inflation

Consider the core inflation rate, which excludes volatile food and energy prices, still hovering around 3.3% year-over-year. This is significantly above what was considered normal just a few years ago. Wages have also been on an upward trend, not just to catch up with past inflation but as a new expectation for future price levels. This wage growth which begets a wage-price spiral … combined with persistent shortages in certain sectors due to demographic changes or regulatory constraints, keeps inflationary pressures high.

This is even more clearly evident when you look at ‘Sticky’ inflation indices, which measure the price changes of goods and services that do not fluctuate as much month to month are printing at levels we have not seen since June of 1992.

This indicates that inflation has transitioned from being a byproduct of short-term disruptions to a more entrenched, structural issue.

Moreover, the ‘sticky’ inflation component, which gives us a clearer picture of long-term trend without the noise of monthly volatility, remains elevated. This suggests that the economy has adjusted to a higher inflation environment. Businesses are now pricing in higher costs for labor, materials, and logistics, which in turn feeds into consumer prices. Even as some sectors see price stabilization, the overall inflationary trend remains stubbornly above pre-crisis levels.

Summary

In summary, the inflation we’re dealing with today isn’t just a hangover from the supply chain issues and policy responses of 2021. It has evolved into structural inflation. The initial shock has subsided, yet inflation remains high. Year-over-year prints, alongside sticky inflation metrics, suggest that we’re now in an era where higher inflation is the new normal. This shift indicates a need for businesses, policymakers, and individuals to adapt to an economic landscape where price increases aren’t just temporary but a feature of the economic structure.

Structural inflation is inherently more challenging to address than single inflationary shocks because it stems from deep-rooted changes in the economy rather than temporary disruptions. Unlike shocks that can be mitigated with short-term policy adjustments, structural inflation requires systemic solutions, such as labor market reforms, supply chain overhauls, or shifts in regulatory frameworks. These measures often take years to implement and carry significant economic and political trade-offs. Moreover, the persistence of structural inflation can lead to ingrained expectations of rising prices, making it harder to break the cycle without drastic interventions that risk slowing economic growth or increasing unemployment. This complexity underscores the need for a long-term, balanced approach by policymakers and businesses alike.

Until next time, stay safe … and trade well.

Trading Room News:

Polaris Trading Group Summary: Wednesday, December 11, 2024

The day began with an active morning session driven by the release of CPI data, which fulfilled the initial upside target of 6065 early on. PTGDavid identified key trading strategies and provided updates on market dynamics, emphasizing the importance of being prepared for potential connectivity issues due to adverse weather conditions.

Key Highlights:

Final Observations:

Overall, a highly successful day with significant lessons in trade execution, adaptability, and community-driven support.

DTG Room Preview – December 12, 2024

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Disclaimer: Charts and analysis are for discussion and education purposes only. I am not a financial advisor, do not give financial advice and am not recommending the buying or selling of any security.

Remember: Not all setups will trigger. Not all setups will be profitable. Not all setups should be taken. These are simply the setups that I have put together for years on my own and what I watch as part of my own “game plan” coming into each day. Good luck!