A1 Trading

Trading FOMC This Week

June 10, 2024
Frank Cabibi

One common principle in the trading world is "don't trade the news". However, if you like trading into the hype, during the chaos, or in the aftermath, here are some ideas that could help you in picking direction this week. It all depends on FOMC and CPI.

Bonds are in demand

The 10 year treasury bond is bullish at +7, our most bullish asset on the EdgeFinder. The reason bond prices are in demand is due to the expectations of lower bond yields in the future. Lower yields means higher prices.

Investors are not expecting rates to go higher now that the Fed talks more about cutting than hiking. The next likely move from the Fed will be to lower interest rates, thus propelling bond prices. If we want to see a more expensive 10 year bond, we probably want to see lower inflation.

Gold needs the green light from CPI

The demand for gold remained mostly unchanged from last week's COT. Price crumbled on Friday on better than expected NFP. However, with an uptick in unemployment to 4%, the US has not seen this level for a few years. Once we hit this threshold, finding a job becomes increasingly harder for women and minorities.

Price hit support and may be trying to bounce from the lows after a 3% drop Friday. For this week, we are going to need to see worse economic projections from FOMC and lower CPI. The reason lower inflation is bullish is because it can prompt the Fed to cut. Higher or sticky inflation will only delay the rate cut and continue to put pressure on the metal's demand.

EURUSD falls from strong bullish bias

EURUSD Falls from Strong Bullish Bias

EURUSD is no longer a strong bullish score on the EdgeFinder and is now hovering around neutral. The US economy is performing better than the EU, and ECB cut their interest rate out of concern for the economy.

Depending on the CPI data, FOMC may take a more hawkish stance if inflation remains sticky. If CPI moves lower, investors may become very excited for a rate cut in September. So, a lower CPI could be bullish EURUSD and a higher CPI may be bearish.

Retail Spotlight

Adding to the overall market indecisiveness, retail is strongly short biased against the S&P at over 70% short. NAS is also majority short, and Dow Jones is mixed.

Smart Money Spotlight

The reason for this confusion couples with the fact that COT is also short this week on the indices. US30 and SPX are the largest changes to the short side. This may suggest that no one knows where the market is heading for now. This week will definitely provide a clearer picture on smart money sentiment, but there is so much uncertainty that it is hard for me to guess where I think indices, gold and dollar are headed in the short term.

Fundamental Spotlight

Something we covered today in the livestream was the yield curve chart. This is the 3 month yield plotted against the 10 year. Every time the 3 month has crossed underneath the 10 year, we've seen a recession follow. This is the longest the yield curve has been inverted. Every time the curve crossed back above the inversion line, it was only a matter of time before a big correction. The examples we can look at on this chart are from the dot com bubble in 2000, the 2007-08 financial crisis, the COVID crash, and now - whatever this is. It's concerning to see such prolonged exposure below the inversion line. We know at some point, the shorter term yields will become less lucrative than the longer term ones. And when that happens, we may have to be very cautious of what may follow.

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