1. Moving the markets

After yesterday’s drubbing, short-term market direction reversed again with the major indexes recovering just about all of Wednesday’s losses.

A drop in jobless claims to the lowest in decades provided the backdrop and gave confidence that the economic recovery remains on track, despite much evidence to the contrary.  

Hope that a ceasefire in Ukraine could be forthcoming may have been just overly optimistic thinking, but it helped to support the bullish mood, nonetheless.

Bond yields spiked again with the 10-year adding 7 bps to close at 2.368%. Global bonds are still suffering the largest drawdown on record, as ZH pointed out, as yields slowly but surely pick up upward momentum.

The US Dollar inched higher, Crude Oil got hammered back to the $110 marker, while Gold had a solid session by adding +1.30%.    

The 2/10 yield curve has now inverted meaning that 2-year bond yields are higher than 10-year ones. This has always been a precursor to a recession, as Bloomberg demonstrates in this chart.

Should that happen, Wall Street traders will be a happy bunch, because it means that lower rates hopefully will be on deck again.

1. Moving the markets

Yesterday’s rebound ran into a brick wall this morning with the major indexes getting stuck below their respective unchanged lines throughout the session. The usual afternoon ramp-a-thon was conspicuously absent leaving stocks no choice but to drop into a sinkhole.

For sure, the path of least resistance was down, with not only a short squeeze lacking, but also with dip buyers apparently having left the trading floor for the day. This sudden downdraft is exactly the reason why I have refrained from confirming a new “Buy” signal. We are in a stalemate market environment where the long-term direction can’t clearly be identified, and the odds of experiencing a whipsaw signal are greatly enhanced.

Yes, the markets are trying to find some footing in the face of spiking interest rates, ever-present inflation fears and an economic slowdown, which may eventually negatively affect earnings. Let’s not forget the war, supply shortages and global energy issues, no matter where you look.

Not helping matters was news that New Home Sales unexpectedly tumbled in February (-2%), as ZH reported, with mortgage applications crashing. What’s even worse was the fact that January’s -4.5% drop was revised to a drastically worse -8.4% plunge. Ouch!

Bond yields dipped, after the recent spikes, with the 10-year settling at 2.29%, down 9 bps. The US Dollar round-tripped and ended moderately higher, while Gold, Energy (VDE +1.74%) and Crude Oil showed a lot of strength by closing solidly in the green.

In terms of Crude Oil and the Energy sector, problems, especially now in the Diesel market, are not over by a long shot, which ZH summed up best:

• This is far from over – even if US equities seemed to be telling a different tale in recent days.

1. Moving the markets

Traders and investors alike tried to digest Fed head Powell’s comments that interest rates may be hiked with twice the magnitude (50 bps) as had been assumed (25 bps) due to inflation “being much too high.”

Despite that hawkishness, the markets are considering Powell’s current and future planned increases as a policy error, with Wall Street clearly focusing on the long-term implications rather than the immediate ones.

Even though, it’s simply odd and not sustainable that markets can rally on “easing” and rally on “tightening” news, this aberration will end sooner or later. However, this chart clearly shows the upside-down world we are in.

Traders are aware that rate hikes will continues throughout 2022, but the Fed will have to ease again during 2023/2024, with the foregone conclusion being that later this year a slowdown/recession will materialize causing a reversal of policy.

In other words, a future recession and rate-cut odds will happen in sync, which allowed the major indexes to keep the current rebound alive, with support coming from a continued short-squeeze, which started on March 15.

Bond yields ratcheted higher with the 10-year adding another 8 bps and closing at 2.38%, thereby exerting more pain on bond holders, as prices got crushed. The widely held TLT (20-year bond ETF) is down -12.04% for the year. So much for the perceived security of bonds.   

The US Dollar slipped, as did Crude Oil, with Gold initially selling off but recovering into the close with modest loss of -0.40%.

In summary, the markets are hopeful that the much-feared recession scenario will materialize, if for no other reason than that the Fed will be forced to cut rates, which is the driver necessary to propel stocks to new all-time highs in the face of deteriorating economic conditions.