[Chart courtesy of MarketWatch.com]

1. Moving the markets

Last week’s thrashing of the markets was the worst so far in 2023. So, it comes as no surprise that traders and algos engaged in some bottom fishing with another big week in retail earnings hopefully proving the support to give these efforts some staying power.

While the early thrust petered out, at least the major indexes were able to close out the session with moderate gains. The recent spike in bond yields, with the 10-year kissing its 4% level, created a risk-off scenario, but today’s slight pullback helped yet gave only limited support to equities.

The economic data bag was mixed, and we learned that US Pending Home Sales exploded higher in January, but the Dallas Fed Manufacturing Production index plunged into contraction, dipping to -13.5 from -8.4. Following that same meme were Durable Goods Orders, which plummeted the most since April 2020. Ouch!  

Bucking the trend, and providing more evidence that a Fed pause or pivot is nowhere near in sight, was the Citi Economic Surprise Index, which ratcheted higher—again. Consequently, the Fed’s terminal rate inched up towards the 5.5% level, while rate cut expectations were non-existent, which means hopes of a dovish Fed response have been dashed.

As ZeroHedge pointed out, the ever-present short squeeze has now failed for the 4^th day in a row, confirming the continued tug-of-war between bulls and bears with the S&P’s 4k level being the much sought after price, along with the 200-day M/A, which currently sits at 3,940. If violated, it could trigger some $50 billion of selling by the big boys, who use that level as guiding point for getting out of long positions and establishing short ones.

With the US Dollar weakening, Gold finally managed to rebound off its recent lows.

[Chart courtesy of MarketWatch.com]

1. Moving the markets

The release of the most recent Fed minutes was on traders’ minds, while they looked for clues as to what the next move by the Central Bank would be in terms of inflationary measures. An early bounce of hope reversed, despite a short squeeze, and the bears scored another win with the S&P 500 now having notched its 4^th straight day of losses.

The Fed’s summary showed that inflation hovered well above the Fed’s 2% target, while the Labor market appears to be still very tight and thereby continues to keep upward pressure on wages and prices.

The only positive was the mention of a welcome reduction in the monthly pace of price increases, as MarketWatch reported. But, the disclaimer followed right away in that more progress would be required to confirm a sustainable downward path of inflationary trends.

In other words, no hope was given to those still thinking that the Fed might pause/pivot in the near future. As a result, the early bullish theme shifted into reverse, and two of the three major indexes closed the session with modest losses.

Bond yields rode the roller coaster with yields softening somewhat, as the 10-year pulled back a modest 3 bps to close at 3.925%. However, the Fed’s terminal rate moved higher from yesterday’s 5.33% indicating more hawkishness.  

The US Dollar resumed its trajectory to higher prices and wiped out the majority of Friday’s losses. Gold slipped again and was not able to hang on to its $1,850 level.

The Cleveland Fed’s own inflation forecasting model shows that the disinflation of the past few months appears to have come to an end, as ZeroHedge commented. Does that mean inflation will now rear its ugly head again?

I believe those odds are far better than 50-50.   

[Chart courtesy of MarketWatch.com]

1. Moving the markets

It appeared that traders and algos alike finally were confronted with a reality check, namely that interest rates will not retreat and likely move considerably higher. This has been the consistent theme of the Fed and its mouthpieces, and I have repeatedly suggested that front running and hopeful thinking does not change underlying facts.

That’s what we saw today, as the markets experienced a phenomenon that I call “hammer time,” meaning that all asset classes were slammed and there was no place to hide. Especially not bonds, as all yields rose sharply with the 10-year propelling to its highest level this year (3.96%).

The widely held bond ETF TLT dropped over 2% on the day and has now lost some 6.3% for the month of February. So much for the perceived security of this asset class in times of turmoil.

Surging rates obviously pressured the bullish theme, while retail earnings rang alarm bells regarding the health of the consumer and his ability to keep spending. After all, some 67% of all economic activity is consumer generated. News in the econ arena was poor, with Walmart issuing disappointing guidance, while Existing Home Sales unexpectedly declined in January and collapsed YoY by 37%. Ouch!

The Fed’s terminal rate exploded to over 5.3% and the usual dovish voices, counting on any rate cuts in 2023, disappeared mysteriously. This means, for the time being, that the consistently promoted “Fed pivot” narrative has died.  

The most shorted stocks were clubbed like a baby seal, according to ZeroHedge, and saw their biggest single day decline since June 2022.    

The US Dollar gained a little on the day, causing Gold to drop a tad.