Fed Chairman Jerome Powell has been toying with deflation and inflation throughout the year. It was only a few weeks ago at a congressional testimony Powell talked about the upside risks to the medium - term outlook for the economy. He was implying that the economy could grow faster and inflation could be hotter than expected.
In yesterday’s post - FOMC press conference, his focus was more on deflationary pressures. Even with a large fiscal package which should include direct payments to people , he highlighted deflationary fears. The Fed is dying to see some inflation and they want sustained inflation above their target level before they consider ending the existing emergency policies.
It is clear the Fed is prepared to provide maximum support for many years to avoid a deflationary spiral. They can ultimately tame inflation but deflation is much more dangerous. If you don’t believe me ask Japan.
Equities
We have been discussing the possibilities of an ending diagonal pattern from the lows of Nov 12 in the Dow. Prices carried to 30,325 on Monday. If the pattern is complete the chances are prices can drop to 29,850. Markets should be getting very thin due to the Christmas season and we can see exaggerated price movements. If prices do move above 30.325, the Dow could carry to 30,680. This level could be also a culmination of the completion of a five wave sequence of many degrees.
The E- mini S&P 500 carried to 3704.50. This area has been tested a few times now. This again could be the completion of a five wave sequence from the lows of Nov 10. A decline below 3625 should confirm that the upside pressure is over.
Bonds
We are more convinced on bonds than other asset classes. Upside pressure can be contained at 174^10. The upcoming move down can be swift and long.
Euro
Euro continued to climb higher. But the pattern from the low of 1.2060 on Dec 9 doesn’t look to be impulsive. We see maximum upside to 1.2250 before it tops out.
Gold
Gold is within striking distance of the levels we mentioned in our last report. Good chance we top out at 1875 to 1880 for further side ways trading.
Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund.