10:16 am EDT:  The bearish trend off the (moderately) bearish CPI data pre-market has continued as expected, but accelerated on a much worse than expected Consumer Sentiment reading, which tends to mirror market action more than lead it.  Hence, the remarkable rally since July has effectively not impressed the average consumer (assuming the data is valid), and this in itself is bearish.

Longs in the ES need to push back above 1006.50 to have a chance at a strong close and will likely defend the 994.00 market profile point of control heavily and aggressive longs could fade long this area on a short time frame double bottom.  New shorts will be difficult to enter as this is shaping up to be a strong directional down day with few retracements.  If the ES rallies off 994, then we would hold out for the 1000 level or 1004, not hanging around short above 1006.50. 

Should the ES close below 994 today, we expect the rally is at least temporarily over and for declines to continue into next week.  Also recall that today is a POMO Agency day, and there is a good possibility of a rally from 3:30 pm to 4:15 pm, so day trader/swing shorts may want to cover prior to this time.

The Precise Take – CPI comes out deflationary – can equities shrug off to head higher?

Treasury Analysis:  Yesterday’s 30 Year auction had solid support, allowing the 30 Year T-Bond future to reverse its prior day loss.  The next test will be Monday’s Treasury Int’l Capital report at 9:00 am, which will reveal the holdings of the big name purchasers of US long term debt, then next Thursday’s announcement for the following week’s auctions of Treasuries, which is expected to continue its uptrend and be for a record amount.  The 30 Year looks to be in good shape short term, but we would like to see it take out the 119’08.5 swing high sometime next week. 

The Federal Reserve Bank of New York (FRNY) had already scheduled POMO for the coming Monday and Wednesday prior to the FOMC announcement.  Based on the tentative maturity range, it looks like they will not be buying this week’s supply (3, 10 or 30 Year).  As has occurred each Friday for the last five weeks, the FRNY will be conducting a POMO for Agency securities today.

Time Profile:  The Time Profile for all Agency POMO days that have occurred on Friday since the beginning of the March rally (n=14) has a slightly bullish edge into mid-day and a very strong paint the tape close.  However, for July going forward, the edge becomes bearish in the afternoon, with a tendency for a weak close.  This could be because each of these recent POMO Agency Friday’s has been preceded by a regular POMO day, which tends to have a bearish close on the following day.  Accordingly, because yesterday was not a POMO day, we believe the possibility of a strong close is greater today than the previous five Fridays, even if the day is net down up to that point. 

Trading Today–Putting it all together:  We weigh the markets’ reaction to news as much, if not more so, than the news itself, and have expected CPI to be…

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