1. Moving the markets

The markets pulled back right after the opening, in part due to uncertainty about yesterday’s spike in oil prices and how it might affect the global economic environment.

Not helping matters were a host of econ data showing that a slowdown had indeed arrived, as the Labor market appears to have fractured with job openings and new hires showing deteriorating numbers; their lowest since May 2021.

At the same time, US Factory Orders slipped to 2.7%, a number we have not seen since February 2021. The Citi economic Surprise Index shifted into reverse and, at least for the moment, the adage “bad news is good news” bit the dust.

Apparently, similar weakness was also found in other countries’ s backyards, as the Central Bank of Australia joined the Canadian one in “pausing” on rate hikes.

Hmm, does that mean the Fed will follow suit?

While that is not clear yet, the fallout made itself felt across a variety of markets. The major indexes only corrected moderately, as “most shorted” stocks collapsed. In other words, the squeeze play had run out of ammunition.

With these overwhelming weak data points, it came as no surprise that bond yields tumbled, as the 2-year “lost” its 4% level. The US Dollar succumbed to dovish news and pulled back to its 2-month lows.

Benefiting from this unsure environment was Gold, as the precious metal stormed higher by almost 2% and closed solidly above its much fought-over $2k level at $2,039.

Right now, we are witnessing the worst of both worlds, namely higher inflation, due to a reduction in oil production, while a deteriorating economy warrants a bailout via lower interest rates.

That makes me ponder: Will the Fed continue its hawkish policy to save the dollar, or will they fold by pausing or lowering rates to save the economy?

Hmm…  

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.