 It doesn't get any busier than this week, as fundamentals are driving the market with the FOMC on Wednesday followed by the Bank of England and ECB on Thursday. The biggest question in the global market now is how close the Fed might be to ending its cycle of rate increases. It is no leap to say that we should expect a rise in volatility this week, joining me now to give us an update on inflation narrative and whether this is the final leg of the rally. Michael Kramer, founder of Mott Capital Management. Michael, always great to have you on, man. Thanks for having me, Ricardo. Great to see you. So, Mike, because of the disinflation trends seen over the past month, stocks have recovered a bit. Yields have fallen sharply. The US dollar has rapidly declined against its counterparts. It sounds like financial conditions have eased tremendously, and I don't think that's what the Fed want, but the labor market also refuses to break. Do you think a Fed pivot is coming or are expecting Powell to give a very, very powerful message on Wednesday? Well, it really all depends on what your view on a pivot is, because if one thing is very clear, the Fed is going to be raising rates again, probably another 75 basis points, I think, at a minimum. It's just going to be the pace of which that rate hike goes, because expectations are for a 25 basis point rate hike at this January meeting. You know, but the problem is, is like you said, the labor market remains extremely tight tomorrow. We're going to be getting the employment cost index, which is expected to rise by 1.1 percent, and the employment cost index is still running at around a 5 percent year over year rate. While you have the Atlanta Fed wage growth tracker tracking at attracting at about 6.1 percent, and you have average hourly earnings right now tracking around 4.6 percent. Obviously, last month, there were very big revisions so that average hourly earnings number. So we're going to have to see what the BLS says when the job report comes on Friday, but the job market is extremely strong. A 3.5 percent unemployment rate, initial jobless claims continue to come down, and so that really implies that the Fed is going to have its work cut out for it, even if we see a disinflationary trend in prices over time. Right. And you know, we look at the US economy, it's cooling as the Fed would like. Unfortunately, that growth of the economy has not stalled. We saw the fourth quarter GDP came out last week with above expectations at 2.9 percent. The Fed's preferred inflation measure, we talked about PCE as well, came out on Friday at its lowest pace in more than a year. So let's consider these factors with China reopening. Commodities enjoying a strong rally. If the Fed backs off its monetary tightening too soon and we go into Wednesday and everyone's basically saying, right, we're going to cut off the pace. Could markets see inflation climb again? Well, the market's a very anticipatory type of thing. And if we look at the chart and we just take a look at where financial conditions are right now, they've eased rather dramatically. If you kind of take a look at where they are at this point versus where they were, we were talking about financial conditions on the Chicago National Financial Conditions Index, which we're closing in on zero, which would be sort of considered a neutral rate. And now you can see we're all the way down to a negative 0.4, which is actually suggesting that financial conditions are quite accommodative. In fact, the financial conditions today are more accommodative than they were in all of 2016. So, I mean, when you think about it from that perspective, the economy actually has an economic tailwind from the current pace of financial conditions easing. The problem is we're already seeing the effects of what that financial conditions easing looks like because we've seen the price of oil move up from around $70 a barrel to about $80 a barrel. You've seen the price of gasoline move higher from around 205 to 250 to 260. You've seen copper prices move up from around 330 to 420 all in the last couple of months. These are going to create inflationary pressures. No doubt as we continue to go further. So the Fed is more than welcome to lower the pace of rate hikes to 25 basis points. But if they don't deliver a very hawkish message and you see financial conditions continue to ease, these inflationary impulses will only get worse, especially given that China is reopening and demand for commodities, which remember they are the largest importer of things like copper and iron ore are only going to continue to rise as they begin to restimulate and regrow their economy. Right. And if we focus a little bit on the U.S. markets, they've struggled for a clear direction since the beginning of the year. At the moment speaking, we are in a risk on positive environment. We see signs of more bullish investor behavior and a repeated pattern of the market opening lower on the negative news. But then by close, the market is up on the day. Now that wasn't very necessarily true on Friday, but do you see this positive market continue? So I don't. And one of the reasons why, again, if we look at the chart, you know, as I've kind of noted in the past, I think we're in this symmetrical triangle right now that's finishing playing out. I think we're right now in the throw over phase of it. You can see right here on this red line that I have, this comes off of the March 2020 low, it meets with the June 16th low, and it also serves as a little bit of a support level here in September, and then it acts as resistance and it became a little bit of a focal point here in the fall, here it was resistance again and again we're trying, but not really successfully getting too far above it. Additionally, I think as I can show you in some other charts, I think we're in the middle of what I'm calling an S&P 500 gamma squeeze. And by that, what I'm looking at here is if we look at the implied volatility of a one week 50 delta option on the S&P 500, what you can see right here is that the implied volatility has been rising, similarly to what we saw at this point in time as the price of the index was climbing. And so this is typical of a gamma squeeze. And if we go back and we look at other periods of time, more recently you can see that when typically the one week implied volatility metric is rising, the S&P 500 is falling. And when implied volatility is falling, the S&P 500 is rising. This is a condition here, which is usually accompanied by rising implied volatility and heavy option activity for the same day expiration, all in the calls, are typically associated with a gamma squeeze. And for those of you that don't know what a gamma squeeze is, that is typically what you see when basically a lot of call buying results in market maker hedging, which results in market maker hedging by going out and owning the underlying security, which in turn pushes the price up. As the price goes up, more hedging needs to take place, the higher the price goes, the more call activity comes in. What breaks that squeeze is when implied volatility levels get too high and is no longer profitable to trade the call options. And once that option activity vanishes, usually the price collapses with it. Right. And if we go back into the S&P, if the index manages to break above 4,100, especially what happens on Wednesday, possibly something that could be bullish for the markets, what next do you think? So as the chart shows, I mean, if we get above 4,100, which is right around here, you know, we're talking about an index can rise to 4,230, maybe even go back and reclaim the August highs of 4,300. Right. And, you know, we go back to this volatility discussion that you just mentioned, and we look at the VIX to VVIX ratio. I know you like to look into that. Do they almost have the same conversation or same narrative around the potential direction of the S&P? So it's interesting because the VIX has been trending lower more recently. And when we look at the VVIX, it's been trending higher. And typically when these, as the chart shows, typically when the VVIX is moving higher as the VIX is moving lower, it can serve as a divergent pattern, which can tell us that there may be a change in trend coming in the VIX index. You can see it happened actually here in August, where the VVIX began to rise, which is the orange line well ahead of the turn in the VIX higher. And you are seeing the same thing happen again here with the VVIX moving sharply higher and the VIX looks like it's finally starting to play a little bit of catch-up. And one way you can kind of capture this is by looking at the actual ratio of the VIX to the VVIX. And what it shows is that when this ratio is declining, the VVIX is growing more expensive relative to the VIX index. And in this case, as the VIX begins to rise potentially at a faster pace, they would be categorized by the ratio moving higher. So Mike, the NASDAQ is on a four month high and looks to have the most momentum of all the major indices. Are there enough signs that the momentum could continue or is it similar to the S&P where it might then break downwards? So, you know, if we're looking at the NDX just purely on a technical trend pattern, there is clearly a level of there is clearly an uptrend here. And obviously we would need to break this uptrend to really get more negative on the NDX, which would come somewhere I would call it around 11,700 or so. And likewise, if we were to really get meaningfully above this big level of resistance here on the NDX, somewhere around 12,200, you could see a rally that takes us back to 12,007 and also again, maybe touches the August highs at around 13.6. So as we, as I mentioned also, it's not just the NASDAQ that we're seeing, some of these patterns of toppings in the market are key levels of resistance because if we look at, take a look at the Taiwan index last night, you can see it came up to and tested a very important resistance level that was back here in June and then in August. Also, we can see the same patterns forming in parts of South Korea Cospy. You can see the Cospy right now also getting to, you know, big levels of resistance. Here's your one level of resistance up here, but more importantly, here's your shorter term levels of resistance that, you know, go back to August as well. And then of course, if you go back to Hong Kong, Hong Kong's had a very, very big move higher as well. And you can see that this is also hitting a pretty key inflection point all at the same time. And so, you know, when we think about these things, what this is telling us is that, you know, all these markets are sort of budding up against key levels of resistance all around the same time. Here's your CSI 300 in China tried to break out last night above the same resistance levels that go back to August and it failed and turned lower. So I think what this is all telling us is that these markets are all sort of moving together and gyrating together. Here's your Shanghai composite very similar as well. So if these Asian markets start to go, which it, you know, again, coming to key resistance levels, these Asian markets start to go and you start seeing, I think you're likely to also start seeing some of these U.S. markets begin to go and European markets, because remember, these Asian markets really have had the biggest move and they all started moving. They all started moving just a little bit before those in the U.S. So it's worth keeping an eye on. Finally, just before we talk about currency pairs last week, you and I noted that the Dow is still in a diamond reversal pattern. Is that still something you see there today just ahead of the Fed meeting? Actually, the pattern continues to play out very nicely. We advanced higher as the chart shows last week and we got very close to the upper end of that pattern. So at this point, I still think this pattern is very much in effect and we would be looking for a break lower back to around 33 100 to sort of either confirm that there's another leg of this pattern playing out with another move higher or just a flat out break of the support at 33 100, which would lead to the decline starting probably back to start to maybe 32,000 and then potentially below to 30 30,000 overall. Right. And there's a lot of earnings announcements coming this week. So that could definitely potentially impact that one. But the week ahead clearly sees several key events that could cause risks for the FX markets. We start with the dollar. That starts the week in very narrow ranges and not far from the lows of the year, expecting that the Fed pushes back against easing expectations. What could we see from the dollar? Is there a potential breakout? Well, I mean, if the Fed goes 25 and then pushes back with a very hard message, which I really think they need to do, I think you will see the dollar strengthen materially against most of the major currency pairs out there. I think for the most part, the euro has already priced in a fairly aggressive ECB. And I think the pound is also priced in policy correctly for the BOE. It's really the Fed that seems the market seems to really be going against here and betting on rate cuts while the Fed calls for rates to be held up pretty long for a long time. Yeah, what can we see from the behavior of the dollar just moving into that announcement? So very quickly, if we look at the dollar versus the euro, you can see that we're kind of getting to the upper end here of the range. The euro is sort of starting the flash signs of a bearish divergence with a RSI hitting over 70 and now making a lower high despite the price of the euro going higher. Additionally, when we take a look at the euro overall, you can see that we're at a resistance level right here right at this 109 area. Additionally, we can see that there is a little bit of a downtrend that we got from here to here that we've moved above. But more importantly, when you look at it from this perspective, here you can see there's an uptrend that's firmly in place. But it seems to me that that trend may be changing pace, creating what I think to be is to be a rising wedge. So the initial reaction, I think, is that we come back to and test this broken downtrend around the 106 area. Just on the topic of the ECB, with their announcements and expecting that inflation is still hot and they need to be hawkish, what can you see brewing on the charts of the DAX? Oh, the DAX. Well, I mean, this is sort of the phylogic in some ways. The DAX has been heavily tied to the China reopening trade. And the DAX is certainly at levels where you could certainly say there's very strong levels of resistance. I mean, the DAX is an expensive on a PE basis. But you can see there's a clear negative divergence here on the DAX, on the RSI. And so while the DAX has been able to make a pretty decent move up, and it's actually sort of separated from the DAO because it had been trading nicely along with the DAO, you can see that we're not even really that we're not even close yet to breaking the trend line. So for right now, that you got to be careful with the DAX because it can send a lot of false messages because you are sitting at resistance, you really have to be careful in thinking about, you know, if we do break out here and we start taking out these highs at, you know, 15,300, there's certainly a room for it to move higher. But the longer we stall at this level here and the more this RSI continues to trend lower, the closer we get to this trend line, the more careful you have to be because it almost looks like the DAX is setting you up for a false breakout. Right. And just this morning, the Spanish inflation came in hotter than expected. What do you think that means for the ECB? I think it means that the ECB has to continue to raise rates and it can't take its foot off the accelerator because the second that I think they do, you can see what's already happening with commodity prices and you add that China impulse to it. I mean, I think there's a chance that, you know, the Spanish CPI tells you that just because inflation is coming down at a nice pace, it can certainly go the other way very quickly. And I think that data today tells you that. So let's finally, we talk about the Bank of England. You know, they're expected to add another 50 basis points to borrowing costs this week. It seems a bit too early for the Bank of England to be sounding at the all clear on inflation, but that certainly will have a lot of implications on the pound dollar that zone into cable then and it's trading at the keen flexion point, I believe now, but it seems there's plenty of room for an upside. However, if you look at the charts and its price action, it's been kind of hovering around that December 2022 highs with no success yet to confidently push through that resistance zone. So are we are we looking at a rising wedge formation for the second time since December breakout or yet again, another reversal? So as the chart shows here on the on the pound, you're at a very important inflection point around 125. You know, the problem is that the market, I think, has largely priced in aggressive policy from the B of E and the ECB. And so you've had really big runs in the currencies against the dollar. But the real risk is for these isn't so much of what those what their central banks are going to do. It's going to be what the Fed does because if the Fed delivers a 25 basis point or have a bit of 50 basis point rate hike on Wednesday and follows that up with commentary that really hammers home. The idea that financial conditions have eased too much and they're not happy with where inflation is, or they're still very concerned about the high the low unemployment rate and high wages and the conditions that low unemployment can potentially stoke further inflation. The real risk here isn't that the pound can continue to rally. The real risk here is that the pound gives back some of its gains. You can see that again, we've tested 125 a couple of the times. We're unable to get through it to this point. You still have some breathing room before you get to this trend line. But if you get a Fed that delivers that hawkish message on Wednesday, I think you will see the pound reverse and break this trend line and potentially even come all the way back down to the one 10 to one 15 region. So Mike, to finalize everything, we look at the FTSE 100 and it seemed it was going to reach an all time high. What are the technical charts showing? And do you think there's still an opportunity for that ahead of the Bank of England? You know, these things as they get to these all time highs become really, really tricky. Again, I think, you know, partly the reason why we've seen such strong performance in the FTSE is because you've seen this global trade into this, you know, this China risk on trade. And because, you know, the FTSE is heavily weighted with financials and miners and material stocks, you've seen it really out perform like you've seen the Dow and the and the DAX and the Australia 200. And again, you know, if you're going to see financials and materials begin to falter, let's say, because the Fed, you know, kind of pushes back on financial conditions easing and you begin to see the dollar strengthen, commodities go down in price. This is going to have a materially negative impact on some of those FTSE stocks. But I mean, more importantly, again, we're at levels that are really sort of, you know, difficult to surmise from a technical basis because you can see that we've broken above these key resistance levels. But yet we've been unable to take out this May 2018 high. Again, at the same time, you're also seeing, you know, the FTSE stall out here on the RSI sort of telling us that momentum is beginning to fade. So I think if you don't get a FTSE breakout after the Fed and after the Bank of England later this week, I think the odds of it kind of coming back down, especially if the dollar begins to strengthen, the odds of it coming back down, I think increase and clearly a break of 7,700 or 7 to 7,650 would be a very big negative sign for where the FTSE is going. Michael, this has been great. It's always great to speak with you. Thank you for joining us today. Thank you for having me. I appreciate it.