1. Moving the markets

Today, it was Powell himself singing from the same hymn sheet that his mouthpieces have used for months, namely rates may need to go “higher for longer,” a theme I have pounded on ad nauseum.

Maybe today, market participants are finally buying what Powell is selling, which caused havoc in all asset classes, since there was no place to hide other than in cash. The fear now on Wall Street is that the expected 25bps interest hike at the next Fed meeting will give way to a more hawkish move of 50bps. That number had not been priced in at all, but its odds have now risen to above 60%.

Powell’s expressed his hawkish warning like this, as ZeroHedge pointed out:

…. If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes… The historical record cautions strongly against prematurely loosening policy. We will stay the course until the job is done.

Even though the above was nothing new, the markets were rudely awakened from their dream state of imagining “pause or pivot” soon. That type of wishful thinking was crushed for the time being, as Terminal Rate Expectations propelled to the 5.65% level.

Bond yields were mixed with the short end exploding higher, as the 10-year crossed above 4% again, but it was not able to hold that level, stalled and “only” closed up 12bps at 3.98%.

As a result, the US Dollar surged +1.21%, as higher rates make the currency more attractive, Crude Oil crashed about 4%, and Gold was clubbed for a variety of reasons, like fraud by the Perth Mint, a strong dollar and Powell’s hawkish speech. The precious metal managed to successfully defend its $1,800 level.

The markets are now facing an onslaught of economic data ranging from tomorrow’s ADP and JOLTS reports, Friday’s non-farm payrolls, and next week’s CPI, PPI and retail sales.

While the directional outcome is uncertain, the fact that more volatility is on deck will keep the ongoing tug-of-war between bulls and bear alive.  

1. Moving the markets

Equities tried to build on last week’s bullish momentum with an early bounce, which coincided with sliding bond yields, as the 10-year slipped towards its 3.9% level.

However, a sudden spike in yields put the bears in charge, as the 10-year ripped off its lows and climbed back towards the 4% marker. That pulled the major indexes off their lofty levels and towards their respective unchanged lines.

In the end, not much was gained or lost. Upcoming events, like Fed head Powell’s congressional testimony on inflation and interest rates, as well as Friday’s jobs report, may have had a negative influence on traders’ and algos’ willingness to commit.   

The short squeeze, which usually accompanies early upward momentum, faded fast, as interest rates spiked. The US Dollar went sideways, while Gold slipped a tad after an early bounce.

Clearly, Wall Street was mired in uncertainty, and new directional impetus is needed, as the tug-of-war between bulls and bears continues.  

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.