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.

1. Moving the markets

After an early pump, which faded in a hurry, the major indexes dug themselves another hole, but a late session bounce helped avoid a much worse outcome. Still, the Dow and S&P 500 scored another loss, with the Nasdaq clinging to its unchanged line and closing in the green by a tiny margin.

Of course, there was not much bullishness to be found anywhere due to traders’ anxiety ahead of the Fed’s announcement on interest rates tomorrow. The much anticipated 50 bps increase has now been replaced by expectations of 75 bps with an outside possibility of 100 bps. The latter would sure cause havoc with the markets.   

Much confidence in the Fed has been lost, as they wasted almost an entire year referring to inflation as being transitory and therefore letting the monster get out of control. As I always said, trying to contain inflation, once it has charted its course, is like putting the tooth paste back in the tube.

Bond yields were in rally mode with seemingly nothing being able to stop their advances. The 10-year surged above 3.47%, its highest level since 2011, according to ZH. That helped the US Dollar to add 0.37% for the day and reach a high last seen in late 2002.

As is the case when the dollar rallies, gold suffers, and today was no exception, as the precious metal headed back down towards its $1,800 level.

All eyes are now on the Fed.

1. Moving the markets

Friday’s drubbing was followed by an ugly overnight futures session, which already pointed towards another knock-down of the buy-and-hold crowd and the dip-buyers.

Things got worse as the fifth largest ‘sell program’ in history was launched, as ZeroHedge elaborated, and wreaked havoc with the markets, while sending the S&P 500 back into official Wall Street bear market territory, which the index had touched a few weeks ago.

It was a Puke-A-Thon at its finest with Bloomberg offering this explanation:

Sell programs of this size are typically no single events. They tend to happen in clusters, and that probably means stocks might be in store for bigger losses.

Bond yields surged, as the major indexes got clobbered with the S&P 500 losing almost 4%, but the Nasdaq fared worse by giving up 4.68%. The 10-year ripped higher by an amazing 22 basis points to close at 2.389%! For context, the 2-year has now reached its highest yield since 2008.

All asset classes were clubbed, and even gold could not escape the carnage, as a host of news combined to hand the bears a chest-pounding win. ZH noted that event risk anxiety ahead of the FOMC meeting combined with Option Expiration technicals ($3.4 trillion option expirations) and European ‘fragmentation’ fears, along with the usual political and economic worries, were simply too much for traders to handle.

Financial conditions are tightening again and are zigzagging in tune with daily news as to the Fed’s next cause of action. This was not helped by sudden increase in expectations that the Fed might hike 75 bps instead of the assumed 50 bps when they meet this Wednesday.

As a result of soaring bond yields, mortgage rates rose and topped 6%, the US Dollar reversed from its recent sell-off and raced higher, while gold suffered from higher rates and gave back its $1,850 level.

Even though, this bear market may present us with some bounce-backs, the major trend remains lower, and in my advisor practice, we continue to be out of equities but have some limited exposure in selected sector ETFs.