1. Moving the markets

Bullish attempts to keep yesterday’s comeback alive ended up failing, as the major indexes surrendered early gains and ended up the hugging their respective unchanged lines with not much to show for.

Initially, stocks had blasted higher, despite weakness in the futures markets. For a while, it looked like we were facing another “bad news is good news” scenario, as Fed President Harker opined that the “US economy might see a modest contraction in growth,” along with “we could have a couple of negative quarters.”  

This negative talk was immediately translated as being a positive for the markets, as it would move the recession into the more immediate future, which would then result into inevitable rate cuts and a new QE program. That “should” translate into a revival of the bull market, or so the theory goes.

Regarding inflation, the Fed is way behind the curve and needs to implement a far more aggressive tightening cycle. Analyst Simon Ree tweeted this amazing stat:

Once inflation goes above 5%, it has never come back down without the Fed Funds rate exceeding the CPI.

As ZH explained, the problem is that the current CPI is 8.58% and the Fed Funds rate is only 1.58%. Graphically, it looks like this. That means the Fed would need to hike at least 7% until inflation would start to roll over and potentially allow for the so-called soft landing. Good luck with that…

Despite falling bond yields, equities could not sustain any upward momentum. The 10-year plunged 12 bps to close at 3.16%. The US Dollar dumped after yesterday’s pump, while gold meandered aimlessly but closed a tad in the green.

Sure, we could see another short squeeze into the end of this quarter, but in my mind, its duration will be questionable.

1. Moving the markets

It comes as no surprise that the major indexes would eventually manage a bounce back from the brutal losses not only YTD but also from last week, which saw the S&P 500 surrender -5.8%—its worst 5-day stretch since 2020.

A more aggressive stance on interest rate hikes by the Fed, and increasing odds of a recession, combined forces to give the bears the upper hand. Considering the ever-worsening economic numbers, any rebound may be short-lived, but opinions also abound that the sell off was way overdone.

For sure, rebounds or rallies into the end of any quarter occur with great regularity, which means we’ll have to wait till July to get a better handle on whether this is simply a dead-cat-bounce or a true bottom. I believe it’s the former and not the latter.

Looking at economic numbers, you must wonder what drove today’s rally. Existing Home Sales tumbled to a 2-year low, according to ZeroHedge, with the NAR warning that “worse is to come.”

Adding to that negativity was a deteriorating Chicago’s National Activity index. As a result, we can see that the Economic Surprise index keeps worsening. Bond yields were mixed with the 10-year adding 6 bps to close at 3.30%. The US Dollar slid, but it was not enough to lend support to gold, as the precious metal lost -0.42%.  

In the end, today was simply a reprieve for the buy-and-holders, but keep in mind that one bullish day does not indicate a directional trend change.

1. Moving the markets

The much-anticipated Fed announcement came and went, with the Fed hiking rates by 75 basis points, its largest increase since 1994. They also hinted at a similar increase in July, which indicated some seriousness about its inflation fighting efforts, but it also caught traders of guard.

It’s been no secret that the Fed’s policy has been out of sync with inflation realities, so today’s aggressive stance pleased the markets—at least for the time being. The question remains whether the Fed is now hiking rates into a recession.

So far, the answer is “very likely,” as the Atlanta Fed slashed its Q2 forecast to 0.00% from the recent 0.9%, which means the US is on the verge of a technical recession after Q1’s contraction, as ZeroHedge called it.

Yet, Fed head Powell had this to say:

The US economy is in a strong position and well positioned to deal with higher interest rates.

There is no sign of a broader slowdown in the economy that I can see.

Hmm, I am sure that Powell will have eat these words eventually, in the same way he had to walk back the “inflation is transitory” scheme.  

The markets took it all as a bullish sign, and after the recent drubbing managed to string together a green close. Sliding bond yields helped, with the 10-year dropping some 16 bps to close at 3.31%.

That downward action caused the US Dollar to puke and surrender some of its recent gains. The beneficiary was gold, which stormed out of the gate and ripped higher by +1.3%, while Crude Oil extended its recent losses.   

In economic news, Homebuilder Sentiment tumbled back below pre-Covid levels, as ZH pointed out, and US Retail Sales unexpectedly tumbled in May and showed its first negative print since December 2021.

All this simply shows that the likelihood of “Stagflation” being in our future seems to increase on a daily basis.