Credit Flow Investor

Core inflation is at its lowest 1.74 (need 2.0). The Fed inflation forecast is bad.  In January, they talked of rising inflation and in March when rates went up last time:

“Janet Yellen, chair of the Fed’s board of governors, said the economy is on a healthy footing as unemployment is falling, and so rates need to go up to limit rising inflation. She expects the central bank to increase rates twice more this year, accelerating from the single rate hikes in both 2015 and 2016.”

“The median projection noted by Ms Yellen indicates the target rate will rise to 1.4pc by the end of the year.”

This implies one more rise this year so there will be a “pause” in September and a rise in December to 1.3 or 1.25.

See Fed Futures chart below:

Today VIX is low at 10.11. The low inflation and vix will pressure SPY higher and the ‘wealth’ effect (staircase up). The Fed will pause no doubt.

Rising Fed rates means accelerated lending supporting the economy:

1. Fed Raises Rates
2. Borrowing Accelerates
3. Oil goes down stimulating ‘core’ economy
4. SPY goes up as ccpi < 2.0, momentum (staircase up continues)
5. ‘Wealth effect’ increases

The USD should also start to rise.

See below in 2014, gas drops and core inflation rises from Jan 2015-onwards and reaches the magical 2.0 Nov 2015 reported in December.  The Fed raises rates in Dec 2015 and market falls 10% in Jan 2016.

Next, we need to see core inflation rising to 2.0 (by October). The market would then fall 10-12% after the Nov. 1 Fed Mtg.

In 2008, oil rolled over beginning of July:

The roll over in oil occurs May-Jul time frame every 3 years…MACD weekly is a good indicator for oil direction.

In the OFC model, oil has been satisfied and will have downward pressure from here as Fed raises rates in Sep and Dec.

1. unemployment low driving rents higher
2. core inflation will rise due to rents, healthcare
3. Fed has stated it will raise this year

The USD downward momentum has peaked. With oil down and USD rising in the next 3 months (reinforcing a downward oil momentum), the setup is for a Sep-Oct SPY fall.

Oil is flattening out/sideways.  It’s losing momentum and is ready to roll over.

It will roll over in Sep this time instead of end of June.

AND Fed is likely to raise rates again in Dec…job numbers (Uclaims YoY) are very good!

The last 2 months had low core inflation Mar (-0.1) and Apr (0.1) but it will revert back to mean of 0.183. Core inflation has been driven higher by obamacare and rent (shelter).  These trends are strong and will continue until next recession 2019-2020 which is still far away:

1. Delinquencies are low and still declining.
2. Unemployment claims still declining -12.5%
3. Unemployment rate very low…met Fed targets
4. Gross cpi still strong at 2.2
5. Rents still strong

Rents are increasing at 3.5% annualized and are sticky. Rents are the biggest part of cpi  at 33% (42% for housing) and now are above the ccpi rate of 1.9 pressuring it higher. June Fed Meeting will be cautious causing a short rally…then a 2% fall after July meeting.

As USD has X 40wkma to downside, oil will rise/sideways and inflation rises for 3 mo.  Oil is now tightly correlated to SPY preceding 1 week only. 3 mo of oil rise/sideways will cause ccpi to recover to 2.0.

So I expect oil to X 40wkma in early September before Sep 20 Fed Mtg…

And just core:

Core inflation grows again in april..

1. Energy has turned up (fall in Mar is energy related -3.2!) now 1.1
2. New vehicles drop less
3. Used drop a lot less
4. Shelter jumped 0.1 to 0.3…shelter consistent at 0.3 driving core up

Oil was strong this week and X 40wkma as predicted. USD has X below the line pushing inflation up. SPY will rally in 1-2 weeks driving ccpi higher by Jun or Jul Fed Meeting.

Oil will X back above 40wkma. This is good as a July Xover is better. CCPI fell to 1.9 in April.  This should rise to 2.0 by June fed meeting .  USD is falling a bit in response to ccpi 1.9. This will pressure inflation up.  CPI release comes out June 14 same day as Fed Mtg.

Fed will use cautionary language on June 14 causing oil to X below 40wkma in July and then Fed will raise Sep 20.

Oil has X the 40 wkma. This is fundamental to any -10% correction.  So global liquidity is starting to dry up.

The OFC model :

Oil has now X 40wkma

Fed Rate raises Sep

Calendar Sep after holidays

With a Sep correction, Jan will also follow on. Also the tremor of 2% pullback occurred in Mar-Apr. There’ll be another pullback Jun-Jul as well.

And of course, oil crossed the 40wkma.  The first time since Jul 2014.

From this chart…no rise Jun….Sep and Dec.

Lowest unemployment rate in 10 years means more rate rises…

Why is Sep bad for stocks?

from http://www.investopedia.com/ask/answers/06/septworstmonth.asp:

There are several theories which attempt to explain this phenomenon. One particular theory points to the fact the summer months usually offer light trading volumes on the stock market, as a good deal of investors typically take vacation time and refrain from selling stocks from their portfolio. Once fall begins these investors typically return to work and exit positions they had been planning on selling. When this occurs, the market experiences increased selling pressure, and thus an overall decline.

As well, many mutual funds experience their fiscal year end in September. Mutual fund managers, on average, typically sell losing positions before year end, and this trend is another possible explanation for the market’s poor performance during September.

You need to know the context though…Now it’s not always the case BUT last Sep was actually not bad and we have inflation and fed rate rises this year.  Also SPY has had a great rally this year so far.