[Chart courtesy of MarketWatch.com]

1. Moving the markets

The Dow Jones Industrial Average was on a roll this week, hitting new highs on hopes of a strong economy, tame inflation and solid earnings. But the party came to an abrupt halt on Thursday, when the index reversed course and plunged into the red. What happened?

One culprit was Honeywell, whose shares dropped after the company reported lower-than-expected revenue and cut its full-year outlook. Another was the 10-year Treasury yield, which jumped above 4% for the first time since 1999, spooking investors who fear higher borrowing costs and lower profits.

But the main trigger for the sell-off was a rumor that Japan might adopt a policy of yield curve control (YCC), which means capping long-term interest rates by buying bonds. This sent the dollar tumbling against the yen, which in turn pushed up the US bond yields.

The irony is that the US economy is actually doing quite well, as evidenced by the latest data. The second-quarter GDP growth came in at 2.4%, beating expectations and showing no signs of a recession. The inflation gauge also eased to 2.6%, down from 4.1% in the first quarter. And Meta Platforms, formerly known as Facebook, posted stellar results and guidance, lifting its shares by 5%.

The Federal Reserve also seemed to strike a balanced tone on Wednesday, when it raised its key interest rate to 5.25%, the highest level in 22 years. Fed Chair Jerome Powell said the central bank could either hike or pause depending on the data, leaving some room for flexibility.

But none of that mattered to the market on Thursday, as investors focused on the rising bond yields and the potential impact on corporate earnings and valuations.

Precious metals also took a hit, as gold and silver prices fell sharply after the strong GDP report. The data suggested that the Fed’s tightening campaign has not slowed down the economy as much as expected, raising the possibility of more rate hikes in the future.

So, what’s next for the market? Will it bounce back or continue to slide? That may depend on how the bond market behaves, and whether Japan will indeed adopt YCC or not. Stay tuned for more updates.

Read More

[Chart courtesy of MarketWatch.com]

1. Moving the markets

The Fed finally raised the interest rate by 0.25%, as everyone expected. The markets cheered at first, but then realized that the party was over and went back to their gloomy mood. Only the Dow managed to stay positive by a hair.

The problem was that the Fed didn’t sound too confident about its own decision. Powell kept saying that the Fed would “do more” if needed, and that it would watch the data closely before making any more moves.

He also hinted that the Fed might have gone too far or too fast with its tightening policy, and that inflation was still nowhere near its 2% target. But the data didn’t really support the Fed’s actions.

The unemployment rate was the same as it was a year ago, when the Fed started hiking. The financial conditions were easier than they were last fall when the Fed was supposed to be tightening. And the S&P 500 was back to where it was when the whole thing began.

So, what did the Fed achieve? Nothing much, except pushing commodity prices higher, which was not what it wanted. Powell tried to cover all his bases with these statements:

• *POWELL: FOMC TO TAKE DATA-DEPENDENT APPROACH ON FUTURE HIKES

• *POWELL: WILL CONTINUE TO MAKE DECISIONS MEETING BY MEETING

• *POWELL: POSSIBLE WE’D RAISE OR HOLD IN SEPT. IF DATA WARRANTED

• *POWELL: AS STANCE IS MORE RESTRICTIVE, INCREASINGLY FACE RISK

• *POWELL: POLICY NOT RESTRICTIVE ENOUGH FOR LONG ENOUGH

• *POWELL: IDEA OF HIKING RATES UNTIL INF. AT 2% IS WAY PAST TARGET

• *POWELL: DON’T SEE INFLATION BACK AT 2% UNTIL ABOUT 2025

But the markets were not impressed. They saw through his bluff and shrugged off his words. The day ended with little change in most indexes, except for Google and Microsoft, which moved in opposite directions after reporting their earnings.

Google beat expectations and soared 5.8%, while Microsoft disappointed with slower cloud growth and fell 3.7%.

The 10-year bond yield and the dollar both dipped slightly, giving a boost to precious metals.

Meanwhile, billionaire Thomas Peterffy had a different view from Wall Street:

“The market should be much lower. US soft landing is wishful thinking.”

Maybe he knows something we don’t?

Read More

[Chart courtesy of MarketWatch.com]

1. Moving the markets

The Dow kept its winning streak alive for the 12th day in a row, shrugging off mixed earnings and the looming Fed decision on rates. Traders and algos were in a bullish mood, pushing the index to its highest level in six years.

Some earnings highlights: GM skidded 4% even after raising its outlook, GE soared 6% on a strong report card, and UPS slipped despite averting a strike with the Teamsters.

Google and Microsoft are up next after the bell. So far, 79% of S&P 500 companies have beaten the low bar of analyst expectations for Q2.

The Fed is widely expected to raise rates by 0.25% tomorrow, but the big question is what they will do in September? Many hope that inflation is under control and on track to hit the Fed’s 2% target, so no more hikes are needed.

But what if inflation comes back with a vengeance, as I suspect it will? Hmm…

Consumer confidence surged to a two-year high, while inflation expectations dropped to a 10-month low. These numbers boosted the Economic Surprise Index, which had been lagging lately.

But financial conditions are still as easy as they were when the Fed started hiking rates by 0.5% in May 2022. That’s probably not what they had in mind after five hikes totaling 5%. If that didn’t do much, more hikes are likely, and the odds of another one before year-end are now at 50%.

Banks reversed course after yesterday’s bounce, bond yields edged up, the dollar stayed in a tight range, and gold was choppy with its ETF adding +0.53%.

It’s no secret that insiders know best, and they have been bearish while retail investors drove this market melt up, as this chart shows.

Will they be proven right?

Read More

[Chart courtesy of MarketWatch.com]

1. Moving the markets

The stock market had a decent day, except for the Nasdaq, which barely moved. It managed to squeeze out a tiny gain of +0.19% in the final minutes, but that’s hardly impressive.

This week will be packed with events that could shake up the markets, such as the Fed and ECB meetings on interest rates, the US second-quarter GDP report, the US core inflation measure, and some European inflation data. We’ll also hear from big tech companies, oil giants, and major chipmakers, as well as 165 other companies in the S&P 500.

The Fed is expected to raise interest rates by 0.25%, and many investors hope that will be the last hike for a while. The chances of another hike in September are low, but they have increased slightly from last week. So, don’t hold your breath for a rate cut anytime soon.

The economy is not looking great either. Manufacturing is slowing down, both in the US and Europe. Services are doing better in the US, but worse in Europe. This could lead to the dreaded scenario of high inflation and low growth, or “stagflation”.

But some traders are optimistic and don’t see any signs of a recession. They think the market will keep going up, even though the Economic Surprise Index shows that things are worse than expected. Hmm…

The bond market saw higher yields, the dollar was stable, and gold continued its downward slide. There was also a strange divergence between banks and tech stocks. Banks did much better than tech stocks, which is unusual.

Are traders ignoring the risks facing banks, or are they losing faith in tech stocks?

Hmm…

Read More