1. Moving the markets

Higher interest rates have been pummeling equities all last year, as most bounces ended up reversing and creating lower lows. While the Dow managed to climb temporarily into the green today, the S&P and Nasdaq struggled below their respective unchanged lines with bullish sentiment being suspiciously absent.

The culprit was surging bond yields with the 10-year climbing above its much-watched 4% level but closed a tad below it. This was the 10-year’s first break above it since November. Minneapolis Fed President Kashkari opined that he was “open to the possibility of a larger interest rate hike at this month’s meeting.”

As Bloomberg reported, his focus was inflation, rates, and the economy, and he was as outspoken as ever:

• *KASHKARI: DON’T WANT RECESSION BUT SLOWING INFLATION IS JOB ONE
• *KASHKARI: DON’T OVERREACT TO ONE MONTH OF DATA
• *KASHKARI: I LEAN TOWARDS CONTINUING TO HIKE RATES FURTHER
• *KASHKARI: US ECONOMY IS NOT IN A RECESSION RIGHT NOW
• *KASHKARI: DON’T KNOW IF FED CAN ACHIEVE A SOFT ECONOMIC LANDING
• *KASHKARI: SOME GROUNDS FOR OPTIMISM BUT WE MUST COOL INFLATION

The opening short squeeze turned out to be head fake and faded into the close. The US Dollar retreated but bobbed and weaved throughout the session. That offered Gold the opportunity to rally with the precious metal gaining 0.40%.  

And, as ZeroHedge pointed out, financial conditions are tighten back towards monetary policy reality, which is exactly what Fed head Powell wants. That could imply that the Citi Economic Surprise Index might follow suit, which makes me wonder if that will bring out the “pivot talk” crowd again.

After all, a weak economy needs stimulus via lower rates, which is exactly what the bulls are waiting and hoping for.  

1. Moving the markets

Despite a good midday effort, at which time bullish sentiment exploded to the upside, the bounce turned out to be nothing more than a head fake, with two out of the three major indexes slipping back into the red—not only for the day but for the month as well.

Again, economic data points were negative, with this spaghetti menu of widely followed indicators showing one thing, namely that the direction is “down” with most of them remaining in contraction mode.

Also, US Home prices plummeted for the 6^th straight month in December, which showed the annual growth to be the weakest since July 2020, as ZeroHedge pointed out. But Consumer Confidence expectations improved a tad in February, while inflation rate expectations went the other way and turned higher.

In the end, the weakness in equities can be attributed to one thing, and that is the rally in bond yields with the 2-year gaining almost 60bps, while the 30-year “only” added 30bps, both of which are huge moves and confirm that the Fed’s aggressive inflation stance continues.

Traders had to swallow that bitter pill, which is also shown in this terminal rate expectation chart, with that number (red line) now approaching 5.5%, while rate cut expectation have simply disappeared, as the Fed pivot promoters now have joined the hawkish crowd.

While the 10-year bond yield is still struggling to break above the 4% level, all action was in the short-term 2-year yield, which broke back above its November highs to reach a point last seen in July 2007. Amazing!

The US Dollar, after struggling in January, surged with a vengeance, thanks to higher rates, and is now back in the green YTD. As a result, Gold moved the opposite way and gave back its January gains.

As we move into March, equities will have a hard time finding a bottom, as continuously higher rates will present a formidable headwind, that is if that trend continues.

1. Moving the markets

Last week’s thrashing of the markets was the worst so far in 2023. So, it comes as no surprise that traders and algos engaged in some bottom fishing with another big week in retail earnings hopefully proving the support to give these efforts some staying power.

While the early thrust petered out, at least the major indexes were able to close out the session with moderate gains. The recent spike in bond yields, with the 10-year kissing its 4% level, created a risk-off scenario, but today’s slight pullback helped yet gave only limited support to equities.

The economic data bag was mixed, and we learned that US Pending Home Sales exploded higher in January, but the Dallas Fed Manufacturing Production index plunged into contraction, dipping to -13.5 from -8.4. Following that same meme were Durable Goods Orders, which plummeted the most since April 2020. Ouch!  

Bucking the trend, and providing more evidence that a Fed pause or pivot is nowhere near in sight, was the Citi Economic Surprise Index, which ratcheted higher—again. Consequently, the Fed’s terminal rate inched up towards the 5.5% level, while rate cut expectations were non-existent, which means hopes of a dovish Fed response have been dashed.

As ZeroHedge pointed out, the ever-present short squeeze has now failed for the 4^th day in a row, confirming the continued tug-of-war between bulls and bears with the S&P’s 4k level being the much sought after price, along with the 200-day M/A, which currently sits at 3,940. If violated, it could trigger some $50 billion of selling by the big boys, who use that level as guiding point for getting out of long positions and establishing short ones.

With the US Dollar weakening, Gold finally managed to rebound off its recent lows.