1. Moving the markets

The unexpected overnight surprise came from OPEC+, which announced that they were slashing their oil output by 1.16 million barrels per day. The reaction was swift, with oil prices jumping over 6% and holding that level throughout the session.

The major indexes reacted mixed, with the Dow rallying, the Nasdaq sinking and the S&P 500 trading around its unchanged line but closing in the green. For sure, inflationary fears combined with a dampening economic effect, occupied traders’ minds, but in the end the threat was dismissed.  

But all is not rosy with markets, as analyst Ed Moya instilled some sense of reality:

This current macro backdrop isn’t conducive for a meaningful stock market rally: The economy is recession bound as the consumer is clearly weakening, lending is about to get ugly, energy cost uncertainty will remain elevated for a while, and monetary policy is finally restrictive and about to break parts of the economy.

Not helping the threat of higher inflation, and supporting a stagflationary view of the economy, was the latest manufacturing data, which dropped for the 5^th straight monthly contraction to the lowest since May 2020, as ZH reported.  

Regional banks struggled again with the KRE index taking another dive, as inflation expectations jumped to 5-week highs.

Bond yields rode the rollercoaster after the reduced oil production (inflationary) pushed yields higher, only to reverse and drop sharply after the disappointing manufacturing data (deflationary) showed weakness. It was a classic tug-of-war between inflationary and deflationary forces.

The US Dollar rode a bucking bronco as well by jumping first and then collapsing, which offered Gold the chance to not only reclaim its $2k level but actually close above it.  

I am sure that the possibility of oil prices spiking, and contributing to the resurgence of inflation, after some CPI easing, will not sit well with the Fed. Expectations were for a pause in May, but the markets are now pricing in 65% odds of a 0.25% hike.

1. Moving the markets

Again, the belief prevailed on Wall Street that the worst of the regional banking crisis is now in the rearview mirror, which caused traders and algos to push the major indexes higher for the second day in a row.

Jobless claims dropped moderately but have not gone anywhere in four months, thereby supporting hopes that the Fed might be inclined to slow down its tightening efforts, as the labor market appears to show signs of cooling, which in turn gave an assist to equities.

To me it looks like the market is getting ahead of itself by pricing in a Goldilocks scenario, in which we would see the best of both worlds: Traders expecting a recession with low rates and reduced inflation in an environment that does not negatively affect corporate earnings.

Sure, such a setting would indeed be good for equities, but I don’t think this scenario is even remotely realistic, because all banks are in similar situations like the failed ones, it just has not become public knowledge yet.

That means more systemically important institutions will have to be bailed out with money that the US Treasury doesn’t have. Therefore, dollars must be created out of thin air, and inflation will rear its ugly head again. If the Fed is serious about battling back, interest rates/bond yields will have to go considerably higher.  

These are all known cause-and-effect facts, the only unknown at this moment is the timing of it.

Despite this unbridled optimism about the banking crisis, the regional banking index KRE slipped after riding the roller coaster all day. Stocks followed suit with one Fed governor spewing hawkish words while another walked back the tough talk with some dovish tones, which pulled equities out of their midday slide.

Bond yields slipped a tad, with the 10-year continuing its 3-day sideways pattern. The US Dollar fell to its lowest close since February 3^rd, while Gold ripped higher by +1.63% and stopping just short of its $2k level.  

1. Moving the markets

Judging by today’s rebound, it appears that traders and algos alike were no longer concerned with the state of the banking sector, nor if or when the Fed might shift into easing mode. None of it mattered, as sentiment maintained its bullish influence, with the S&P 500 reclaiming its 4,000 level—also helped by a calm bond market.

Never mind that the Fed’s gauge of financial stress has approached levels of concern, as ZH reported, but it seems that policymakers’ best hope will be that the current calm will prevail long enough to keep the economy from falling off a cliff.

In economic news, we learned that the Pending Home sales rebound slowed in February after a huge 8.1% surge in January.  

I enjoyed market analyst and charting guru Michael Lebowitz’ piece on clarifying that a Fed pivot (to lower rates) is not bullish, if history is any indicator. He states that since 1970, there have been nine instances in which the Fed significantly cut the Fed Funds rate. The average maximum drawdown from the start of each rate reduction period to the market trough was 27.25%, as his chart shows.

Makes me think of the old saying “be careful what you wish for,” something that traders should keep in mind rather than only focusing on the event, expecting that bullish times are here again.

The regional banking sector’s ETF KRE pumped, dumped, and pumped again, which is surely not a sign of certainty or directional clarity. A similar rollercoaster happened to the big banks with KBWB first tanking and then cranking.

The US Dollar limped sideways, while Gold slipped but stayed above its $1,950 level and within striking distance of again taking out its $2,000 resistance point.

With today’s ramp, our Domestic TTI climbed back above its long term trendline for the first time in 3 weeks. Please see section 3 below for details.