A Midsummer Central Banker's Dream (or Nightmare)

The Italians call it, "Ferragosto," which is basically a public holiday for summer vacation in August. Other cultures around the world have similar traditions, especially in Europe. Here in America, most industries keep their noses to the grindstone, or at least they did. But the wizards of Wall Street are usually out on the Hamptons, Cape Cod, or in Italy's Lake Como during the dog days of summer. 

However, before we get to August we have the FOMC this Wednesday, not to mention the ECB and BoJ rate decisions, to boot. We also have mega cap tech earnings with which to contend, namely GOOGL META MSFT, as well as other prominent names like Visa, for example. 

Growth/tech stocks, for months now, have been joyously pricing in the end of inflation and the end of The Fed's hiking cycle. But Powell is still almost a lock to raise rates this week.

The issue, of course, is what happens at the September FOMC. Late-August's Jackson Hole conference should give us more clues. 

However, we have rice, oil, soft commodities, and gasoline futures all rallying in recent weeks, with gasoline's move today gaining upside momentum. In addition to the rally in equities, on top of the resetting base effect of inflation year over year comps beginning with the July CPI (reported in August), the stage is set for nasty upside surprises in inflation, which means the current market remains uniquely, indeed historically expensive, complacent, and bloated.

Hence, the pain trade is still higher rates, which means the TLT (ETF for prices of Treasuries inverse to rates) downtrend is ripe to break lower yet. You will note on the latest bounce attempt the broke weekly triangle could not be remounted by bulls (arrow, weekly chart, below). This is a poor outcome for bond bulls, and they will need a post-FOMC squeeze to counteract that. 

I remain skeptical of that scenario, as I still see too many leaning towards rates going either sideways or lower, and fewer expecting a spike from here. Furthermore, the June "pause" or "skip" by Powell may very well go down in monetary history as being the true policy mistake here, just when many expects are crying about him raising rates again being the mistake.