1. Moving the markets

Traders were stuck in limbo today trying to assess future monetary policy, the current earnings season, which was subpar at best, and the profit outlook for the remainder of 2023.

None of the above deliberations created much motivation by the bulls to drive this market higher, so the path of least resistance was down, with the S&P 500 surrendering some -1.11%.

Company guidance took center stage, as data provider Refinitiv announced that 42 companies in the S&P 500 have issued negative earnings guidance, 8 have posted positive numbers, while many others have not changed their forecast or issued any to begin with.

Alphabet stock took it on the chin this morning by tumbling more than 7%, as competition in the Artificial Intelligence space has heated up thereby limiting the first mover advantage.

However, capping any potential bullish sentiment were a few Fed mouthpieces, who uttered market unfriendly comments like the ones I have repeatedly mentioned: “More work to do, higher for longer, no rate cuts this year.” As a result, terminal rate expectations surged and have now reached a new cycle high of 5.18%, as per ZeroHedge.

Most shorted stocks reversed from last week’s Ramp-A-Thon and did what they are supposed to, namely head south, and bite the dust, which is what we saw over the past 3 trading days.

Bond yields went sideways, the US Dollar eked out a tiny gain, while Gold kissed the $1,900 level briefly but was not able to hold on. Still, the precious metal gained a tad.

The tug-of-war with the Fed continues, but I think next week’s eagerly awaited CPI report may shed some light on the future direction of the markets.

1. Moving the markets

As the chart above shows, pumping, dumping, and pumping was the theme of the day, as traders tried to incorporate Powell’s “transitionary disinflation” in their vocabulary, while assessing if it would produce a bullish or bearish outcome.

Judging by the ramp into the close, the current picture is positive for equities, but traders and algos alike had to sort through seemingly opposing statements during his latest speech.

Here are some of the highlights:

• …disinflation has barely begun and there’s still a long way to go…
• …financial conditions have tightened.
• …more rate hikes are likely to be needed. This process is likely to take quite a bit of time…
• My guess is it will take certainly into not just this year but next year, to get to 2%.
• The reality is if we continue to get strong labor market reports or higher inflation reports, it might be the case that we have to raise rates more than is now expected.

Yet, all Wall Street heard was “disinflation,” and off to the races we went. Never mind that he did not mention any pause or pivot in his speech, and he even stretched the timing of his projected outcome into next year.

Bloomberg’s Ira Jersey viewed market reaction with a sense of reality:

“The market (could it be algos?) again seems to take the word ‘disinflation’ and give it a greater significance than it should have.

But “the caveat of ‘early’ in the process just solidifies my view that the Fed won’t be cutting this year, which is different than the market is pricing.”

I agree with his more hawkish assessment, and that today’s euphoric reaction does not sync up with reality. However, bond yields were mixed, as the US Dollar tumbled, and triggered a ‘Death Cross,” which helped Gold to inch closer to it’s $1,900 level.

The precious metal has now triggered a golden cross, which means its 50-day M/A has crossed above its 200-day M/A, a very bullish sign.

1. Moving the markets

Bond yields jumped sharply with the 10-year adding some 24-basis points to end the session at 3.64%. The markets vacillated predominantly below the unchanged lines, but the major indexes managed to close off their intra-day lows. Still, rate hike expectations have exploded, as the hawkish theme remains to be the dominant one.  

Uncertainty reigned, as traders were still shaken up from Friday’s jobs report, which indicated anything but a recession. That brought into question whether the Fed is truly motivated to pause hiking rated—let alone pivot—both firmly held assumptions which formed the basis of the recent rally, the continuation of which has now become questionable.

Earnings continue to be in focus, but so far profits for S&P 500 companies are on pace to be 2.7% lower than Q4 2022, according to data provider Refinitiv. That means the tug-of-war between earnings and hawkish Fed policy continues, with all players now eagerly awaiting Powell’ speech tomorrow at the Economic Club of Washington.

The US Dollar bounced for its 3^rd straight day, helped by a jump in bond yields, while Gold held on to slight gains, an impressive performance in light of the dollar’s advance.

Trader’s will anxiously dissect Powell’s speech tomorrow for any indication that would clarify whether hawkishness will be the monetary direction for the foreseeable future. If so, the bullish crowd may have to rethink their reckless exuberance.