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.

1. Moving the markets

The release of the most recent Fed minutes was on traders’ minds, while they looked for clues as to what the next move by the Central Bank would be in terms of inflationary measures. An early bounce of hope reversed, despite a short squeeze, and the bears scored another win with the S&P 500 now having notched its 4^th straight day of losses.

The Fed’s summary showed that inflation hovered well above the Fed’s 2% target, while the Labor market appears to be still very tight and thereby continues to keep upward pressure on wages and prices.

The only positive was the mention of a welcome reduction in the monthly pace of price increases, as MarketWatch reported. But, the disclaimer followed right away in that more progress would be required to confirm a sustainable downward path of inflationary trends.

In other words, no hope was given to those still thinking that the Fed might pause/pivot in the near future. As a result, the early bullish theme shifted into reverse, and two of the three major indexes closed the session with modest losses.

Bond yields rode the roller coaster with yields softening somewhat, as the 10-year pulled back a modest 3 bps to close at 3.925%. However, the Fed’s terminal rate moved higher from yesterday’s 5.33% indicating more hawkishness.  

The US Dollar resumed its trajectory to higher prices and wiped out the majority of Friday’s losses. Gold slipped again and was not able to hang on to its $1,850 level.

The Cleveland Fed’s own inflation forecasting model shows that the disinflation of the past few months appears to have come to an end, as ZeroHedge commented. Does that mean inflation will now rear its ugly head again?

I believe those odds are far better than 50-50.