1. Moving the markets

As I suspected yesterday, today’s session might not be much different, and that’s how it turned out. While inflation data, to be released tomorrow and Thursday, loom large, Treasury Secretary Yellen decided to increase the “fear meter” by announcing that failing to raise the debt ceiling would be an economic catastrophe, referring to this afternoon’s “conversation” between Biden and McCarthy.

As a result, traders and algos alike stayed away from making any key commitments, causing the major indexes to chop below their respective unchanged lines. Whether the inflation numbers are interpreted as being “sticky” or not will determine future market direction. As will acceptance of the fact that banking stresses will not just disappear, lending conditions may tighten, and increased reserve requirements will lead to fewer loans and a struggling economy.

Adding to these general uncertainties were hawkish comments from the Fed’s Williams, as ZeroHedge alluded to:

“What we’re signaling is we’re going to make sure that we achieve our goals and going to assess what’s happening in the economy and make the decision based on that data,” he said. “And if additional policy firming is appropriate, then we’ll do that.”

“I do not see in my baseline forecast any reason to cut interest rates this year,” he said, adding that the economy began the year on a solid footing, and he saw two-sided risks to the outlook. “In my forecast we need to keep restrictive stance of policy in place for quite some time.”

We have heard these kinds of words for almost a year, but the markets have not caught on and stubbornly cling to the belief that the Fed will cave and pause or pivot. Only time will tell.

The regional banking sector ETF KRE slipped, as the latest cockroach (PACW) pumped and dumped. The markets followed in similar fashion, but a worse outcome was avoided, as a short squeeze sort of saved the day.  

Bond yields climbed, with the 2-year finally conquering its 4% level again. The US Dollar continued yesterday’s rally but sold off into the close. Gold ramped higher and captured the $2,040 level.

All eyes are now on tomorrow’s CPI report. Stay tuned.

1. Moving the markets

Traders found no motivation to drive the market in either direction, as the release of key inflation data cast a broad shadow on activity. On deck first will be April’s Consumer Price Index (PPI) on Wednesday, which is followed by the Producer Price Index (PPI) on Thursday.

Volatility was the name of the game last week, with the Dow and S&P notching their worst weekly advances since March, despite a strong rebound on Friday. Continuing discussions about whether the banking crisis has finally run its course—it hasn’t—kept traders somewhat agitated.

However, some encouragement pulled the Regional Banking Index (KRE) out of the doldrums early on, but that turned into a head fake, with the index tanking late in the session. Even the most recent banking cockroach, namely PACW, followed suit by rallying some 30%, but in the end, it surrendered all its early gains.

More whispering about short-selling on banks hit a brick wall, when none other than the Fed elaborated on the effectiveness of such a move:

The 2008 ban on short sales failed to slow the decline in the price of financial stocks;

…in fact, prices fell markedly over the two weeks in which the ban was in effect and stabilized once it was lifted.

A tip of the hat to ZeroHedge for this “finding.”

The most shorted stocks went into an early tailspin and only managed to squeeze back to the unchanged line, meaning a zero effect on market direction.

Bond yields rose with the 2-year kissing its 4% level but closing below it. The US Dollar dumped and pumped and managed to eke out a moderate gain. Surprisingly Gold followed suit and pushed towards its $2,030 marker.

I expect more of the same tomorrow in anticipation of the mid-week inflation data.

1. Moving the markets

Observing the markets daily, sometimes I have to laugh out loud, and at other times I simply have to shake my head in disbelief. The latter occurred yesterday, after Fed head Powell had announced that the banking system was “sound and resilient.”

It was only a few hours later when the next cockroach surfaced, namely PacWest bank, which has been assessing “strategic options,” including a sale. To me, that means that the “sound and resilient” nonsense is simply another failed Fed assessment like “inflation is transitory.”

On that topic, Powell uttered the following:

“We on the committee have a view that inflation is going to come down not so quickly. It will take some time, and in that world, if that forecast is broadly right, it would not be appropriate to cut rates and we won’t cut rates.”

Mixing his hawkish outlook with the constantly worsening banking crisis, you now have the perfect combination of what might give equities a knock-out punch. Today’s sell-off added another notch to the bearish bedpost, as the markets again were unable to stage any meaningful rebound, with the regional banking index KRE taking another hit, as some of its members, like WAL and PACW, were severely clubbed.  

The usual short squeeze was conspicuously absent, Bond yields went sideways, with the 2-year closing at its lowest since September 2022, as ZeroHedge elaborated.

The US Dollar went nowhere, but Gold saved the day again by being the “go to” asset class for safe haven seekers.

Apple earnings, due out after the close, could be a game changer tomorrow. Looking at the big picture, however, I am more in tune with the Goldman Sachs trader, who uttered this spot-on remark:

What’s coming in the markets is like when Indiana Jones was running from the boulder.