1. Moving the markets

Continued weak economic data points soured traders’ motivation to drive the indexes higher. As a result, the Nasdaq recorded its 3^rd straight loss, while only the Dow was able to eke out a green close.

The latest ADP private payroll report was another disappointment, after yesterday’s dreadful data, because it showed slowing job growth. The Services survey also took a dive from 55.1 to 51.2, a huge dip considering the expectations of 54.4.

What a difference a month makes. As ZH pointed out, during February, the US Macro Data Surprise Index hovered solidly in green territory, but now this indicator is deeply entrenched in the red, meaning that the much-ballyhooed soft landing may not be playing out as anticipated.

And the Fed’s Loretta Mester was talking out of both sides of her mouth:

Yesterday – MESTER: FED WILL NEED TO GET RATES UP ‘A LITTLE BIT MORE’, SEES FED-FUNDS RATE ABOVE 5%, HOLDING FOR SOME TIME

Today – MESTER: TOO SOON TO SAY WHETHER FED WILL RAISE RATES IN MAY, HOPING WE DON’T TIGHTEN UNTIL SOMETHING BREAKS

Ah yes, a classic case of walking back the talk and shifting from hawkish to dovish.

Given the weakening economic environment, the markets are now counting on lower rates ahead with a Terminal Rate of 4.9% in May, which is to be followed by 4 rate cuts to 4% by the end of this year. Of course, this is not chiseled in stone, and a host of events could derail these assumptions.   

Bond yields dumped after the ADP release, with the 2-year first retreating to 3.64% before rebounding to 3.8%. Despite the overall dovish sentiment, the US Dollar bounced back moderately, as Gold surpassed $2,030 but pulled back to end the session at $2,037, essentially unchanged.

Tomorrow will be the last trading day of this week, due to markets being closed on Good Friday.   

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.