1. Moving the markets

Traders and computer algos marched in sync today by ignoring the fact that the Fed might not be pivoting to lower rates for some time to come, which several Fed heads had made abundantly clear yesterday.

Today, it was St. Louis Fed President Bullard confirming again that “he doesn’t think the US is currently in a recession and that rate hikes to tame high inflation will continue.” That was followed by Neel Kashkari asserting that “2023 rate-cuts seem like a very unlikely scenario.”

As a result, rate hike expectations soared, yet the markets totally disconnected from that reality, as stocks, for the 3^rd time this cycle, decoupled from short term interest rates, making me wonder how long that might last. After all, suddenly, rate hikes are a positive for the markets? Go figure…

As an alternative, investors focused on earnings and better-than-expected economic data (factory orders soared in June) and, with the help of another short squeeze, markets simply ramped higher without looking back, thereby bringing us a step closer to a new “Buy” signal for domestic equities (section 3).

The US Dollar rallied modesty, as bond yields were mixed, gold slipped, while Crude Oil pumped and dumped.

All eyes are on Friday’s jobs report, which will either confirm that things are going in the wrong direction or give support to those opining that strong jobs numbers are holding up the economy.

1. Moving the markets

I have been commenting almost daily on last week’s rally, which was entirely based on wishful thinking that the Fed will have to pivot back to lowering rates. Due to the US having slipped into a recession, traders, who have been frontrunning the market, expected that this event will have to happen sooner rather than later.

However, today, we saw a parade of Fed speakers debunking the hope for a Fed pivot by presenting nothing but hawkish thoughts. ZeroHedge summed up the speakers like this:

SF Fed’s Mary Daly jawboned the doves back by stating that The Fed is “nowhere near done” on fighting inflation, adding that “we have made a good start, and I feel really pleased with where we’ve gotten to by this point,” but inflation is “far too high.”

“It really would be premature to unwind all of that and say the job is done,” she said.

“I also think that we’ve been with this high inflation for a while, and really getting too confident that we’ve already solved the problem,” Daly said, adding that the Fed needs to “keep committed until we actually see it in the data.” 

Chicago Fed President Charles Evans said he is hopeful that reaching 3.5% by the end of the year is “still reasonable.”

“I think that there’s enough time to play out that 50 is a reasonable assessment, but 75 could also be okay” at the September meeting, he said.

“I doubt that more would be called for” at that meeting, Evans added. But Evans warned that “if we don’t see improvement before too long, we might have to rethink the path a little bit higher.”

Cleveland Fed’s Loretta Mester said she saw “no signs of a recession” offering no dovish pivot signal by noting that “we have to get inflation under control.”

To really drive the point home, Mester concluded that she “hasn’t seen anything suggesting inflation is leveling off.”

As a result, rate hike expectations headed north and the markets went south, although the losses were moderate. The early rebound happened with the support of a short squeeze, which petered out in the afternoon.

Bond yields surged with the 5-year scoring its biggest daily rise since 3/17/20, according to ZeroHedge. The widely followed 10-year rallied almost 18 bps to close at 2.75%.

With rising yields, it came as no surprise that the US Dollar gained and gold dropped after briefly piercing the $1,800 level.  

Adding to those uncertainties was Nancy Pelosi’s much debated and questioned “visit” to Taiwan, which for sure increased US/China tensions with any repercussions still being unknown. Anxieties could even worsen once she tries leave tomorrow after spending the night on the island.

Interestingly, Blomberg noted that “company executives are getting much more worried about economic growth, judging by their earnings conference calls,” even as stocks staged a furious rebound in July.

Hmm…I wonder how that will affect future market behavior.

1. Moving the markets

Last week’s relentless hope that Fed head Powell will be forced to pivot due to recessionary forces (lower rates), which triggered a nice rebound, became questionable as to its timing and may not happen as quickly as the markets had expected. That could affect the duration of the current bullish run.

The major indexes slipped moderately after bouncing around their respective unchanged lines, as concerns reigned supreme about the Fed’s progress to stem the course of inflation.  

As per ZeroHedge, three things changed today:

1) Jawboning – A smorgasbord of Fed (former and current) Speakers jawboned down the idea that a Fed Pivot is imminent.

2) Really Ugly Global Data – ISM Manufacturing data was bad and GDPNOW followed suit with a sizable downgrade of its Q3 growth forecast, (which followed terrible data out of China and EU)

3) WW3 Worries – Perhaps only of side notice, but Pelosi’s plan to visit Taiwan raises the risk of WW3 and that is just too bad of news to be buying.

An opening short squeeze helped pull the major indexes out of the red zone, but the effort faded in the afternoon.

Bond yields were mixed, with the 10-year slipping to 2.59%, which was its lowest since the beginning of April. The US Dollar retreated as well and touched a 1-month low.

Gold continued jumping off its $1,700 level and is heading towards the $1,800 marker.   

Market direction will remain headline news dependent with the July nonfarm payrolls report, due out later this week, being a decider as to whether some economists will continue to proclaim the “no recession” mantra. Strong jobs growth has led some to believe that we are not in one, despite two consecutive quarters of negative GDP.