[Chart courtesy of MarketWatch.com]

1. Moving the markets

A roller-coaster month saw the S&P 500 dip into bear market territory (-20% from its recent high), before last week’s rebound rally pulled the index out of the doldrums. But that move ended today, with the major indexes simply running out of steam at the end of the session.

Inflation, monetary tightening and recession fears were at the center of the collapse, but a bear market rally, supported by a gigantic short-squeeze, assisted the S&P in its comeback to the breakeven point for the month.

Higher prices will be with us, as the markets took cues from the Eurozone, where inflation readings hit a record high for the seventh straight month by surging 8.1% in May. Crude oil prices contributed to today’s volatility and almost touched $120 intraday, before fading back to close at $115.

It was a “go nowhere fast” session, which ZH described like this:

30Y Bond unch-ish, S&P unch-ish, Gold unch-ish, Oil way-up, USD down, US Macro data total collapse…

The US Macro Data collapse, outside the April 2020 crash (where the government basically shut down the entire economy), May’s 2022 fall was the worst since October 2008, when all capital markets froze up.

Bond yields were lower during May, as this chart by Bloomberg shows, but today’s turnaround may signal higher yields on deck again. The US Dollar slumped and saw its worst month in 2 years. Gold was down moderately for May and continues to struggle around its $1,900 level.  

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DOW BREAKS OUT OF 8-WEEK SLUMP

[Chart courtesy of MarketWatch.com]

1. Moving the markets

The major indexes continued their rebound out of oversold territory for the second session and managed to combine two bullish days to finally break the Dow’s eight-week slump, while the S&P 500 and Nasdaq each conquered their seven-week losing streaks.

This buying tsunami was unleashed thanks to a PCE (Personal Consumption Expenditure) number in line with expectations. This is the Fed’s favorite index to evaluate the severity of inflation. The core CPE came in on the money, which got the bullish juices flowing, sort of like a relief rally, because the number could have been much worse.

ZeroHedge summed it up best:

And with demand destruction already crippling purchases of airplane tickets after last month’s record surge in air fares (“Runaway Airfare Inflation Is Starting To Cool Demand For Summer Travel, Data Suggests”), expect many more downside surprises in one-time price spikes (if not in food and gas, those are here to stay, but as a reminder, those are non-core prices according to the Fed and as such carry less weight as far as the market is concerned).

But perhaps the most direct reason why stocks have surged today is because as we noted earlier, the US consumer is officially tapped out: a few weeks after we reported that new credit card debt exploded to the highest level on record, which led us to speculate that US savings – either excess or any other kind – are now gone…

This firmed up traders’ opinions that indeed the Fed will pause its rate hiking efforts in September, which is the #1 reason the markets have spiked and turned from bearish to temporarily bullish. The overriding view is that Fed head Powell will then pull off another “December 2018” event, which ended the horrific slide in stocks and supported a return to the prior bull market.

Looking at the big picture, bad news is good news again, as econ data was ugly, yet all Fed speak and rate hike guesses were, at least for today, interpreted as being a positive for the markets. Since last Friday, the Nasdaq, S&P 500 and Dow are up 10%, 9% and 8% respectively, with the latter two now being in the green for the month.

Of course, no bear market rally can materialize without a short squeeze, and this week presented one of mega proportions. Despite this effort, the Nasdaq (QQQ) is still down some 22% YTD, while the S&P 500 (SPY) has done better but remains under water by almost 13%.

Bond yields drifted lower, the US Dollar dropped for the second week in a row, and precious metals eked out some gains. Financial conditions tightened causing ZeroHedge to ponder:

Will the Fed even hike again?

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[Chart courtesy of MarketWatch.com]

1. Moving the markets

Nothing mattered today other the release of the Fed minutes. There were no surprises with the policy meeting notes showing that the Central Bank is prepared to raise rates further than anticipated.

This should have been reason enough for a sell off, but that did not happen. A deeper analysis of the minutes displayed some verbiage that possibly perhaps hinted at the Fed taking a pause of its hiking plan later this year.

That was enough to get the bullish juices flowing and the ensuing rally propelled the major indexes to intra-day highs, but momentum faded into the close. Still, all indexes managed to gain for the day.

Anxiety in the retail sector eased, as Nordstrom’s and Dick’s Sporting Goods surpassed earnings, with the former even raising its full-year outlook. Both stocks climbed on the news.

The tech sector saw support due to some good news from Intuit, DocuSign, and Zoom Video. However, Macro Data was dismal with Durable Goods numbers coming in below expectations, but, if you need bullish support, you can always count on a short squeeze, and today was no exception.   

Bond yields slipped again, despite a 50-bps hike in rates for June being now a foregone conclusion. However, as ZeroHedge pointed out, the odds of another 50-bps hike in July are fading modestly and are tumbling for September.

The US Dollar gained a tad but slipped into the close, while gold dipped and ripped but failed to reach its unchanged line.

ZH summed it up like this: Three more 50-bps hikes and then the Fed pauses… indefinitely; its next move a cut as the economic recession emerges from hiding.

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[Chart courtesy of MarketWatch.com]

1. Moving the markets

One look at the above chart tells the story of the day. With the Dow down over 450 points early in the session, a rebound attempt showed some promise, but it was only the Dow, which ended up at the unchanged line.

Even though the S&P 500 greatly reduced its early losses, the Nasdaq got spanked again and gave back more than it had gained during yesterday’s ramp-a-thon. Contributing to the index’s fall was social media’s SNAP (-41%), which warned that it’s bracing to miss not only earnings and revenue targets but also may slow down hiring.

Billionaire hedge fund guru Bill Ackman offered his view of the current state of Fed policy:

“If the Fed doesn’t do its job, the market will do the Fed’s job, and that is what is happening now. The only way to stop today’s raging inflation is with aggressive monetary tightening or with a collapse in the economy.”

After retail bellwethers Target and Walmart got pounded last week, due increasing labor and transportations costs, today, it was Abercrombie & Fitch’s turn to pick up the baton by announcing that freight and product costs weighed on sales. The punishment was quick, and the stock dropped some 31%.

As ZeroHedge reported, the economy, as measured by the US Macro Surprise Index, crashed into negative territory and to its weakest since October 2021. That caused bond yields to fall with the 10-year dropping to 2.755% thereby giving the much maligned bond holders some reprieve, as the widely held bond ETF TLT rebounded +1.97%. But, that is only a small consolation given that this ETF is still down -21% YTD.

With recessionary expectations on the rise, gold benefited and gained +0.95% on the day, while the US Dollar continued its aimless meandering by falling to its lowest in a month.

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