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.

1. Moving the markets

The Fed offered no surprise and followed the expected theme of hiking rates by only 0.25% with more to come. A mid-day sell-off reversed with traders focusing on chairman Powell’s acknowledgement of falling inflation:

We can now say for the first time that the disinflationary process has started. We can really see that, and we see it really on goods prices so far.

While that was music to the bullish crowd, Powell gave no real hint of a pause in hikes, maintaining that:

Ongoing increases in the target range will be appropriate to a attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time.

But, he appeared to shrug off the fact that financial conditions have dramatically loosened recently, as ZeroHedge pointed out, a dovish fact that surprised traders and created additional upward momentum off the mid-session bottom supported by another short squeeze.

In the end, the markets expected some hawkish tones during the presser, yet Powell did not bite but maintained a more dovish tone pushing terminal rate expectations to much lower levels. Market participants took that as a Fed in capitulation mode.

This affected bond yields, which retreated sharply, with the 10-year dropping all the way below the 3.4% level, which is its lowest point since last September. As a result, the US Dollar got spanked to its smallest since last April, while Gold shifted into overdrive by adding over 1% for the day to close at $1,967.

$2,000 gold looks to be on the horizon.

1. Moving the markets

Traders and algos alike continued with their relentless efforts to challenge the Fed’s resolve of hiking rates for “higher and longer” by propelling the major indexes higher on the last day of the month and the day prior to the Fed’s much-awaited policy announcement.

Again, much of this January move was based on the Fed at least shifting into “pause” mode, which they eventually will, but likely because of the economy is turning over, which will then mean the rally could be short-lived due to earnings taking a hit.

For right now, the overriding theme is a bullish one with S&P 500 having scored its best January since 2019. The anticipation is for the Fed to hike only a meager 0.25% tomorrow, with an 83% chance of another 0.25% in March being baked in the cake.

A massive MOC (Market on Close) order erased all of yesterday’s losses, while the seemingly ever-present short squeeze contributed to January’s comeback. All this exuberance has now reduced the financial conditions to their loosest since June, as ZeroHedge pointed out. This is just the opposite of what the Fed wanted to see, when they called “unwarranted easing” in the last release of their Minutes.

Bond yields slipped during January, the US Dollar fell for the 4^th straight month, all of which benefited Gold, as the precious metal not only surged for the 3^rd straight month in a row but also gained a solid +5.74% just for January—only a hair below the S&P’s +6.29%.