1. Moving the markets

It comes as no surprise that the major indexes would eventually manage a bounce back from the brutal losses not only YTD but also from last week, which saw the S&P 500 surrender -5.8%—its worst 5-day stretch since 2020.

A more aggressive stance on interest rate hikes by the Fed, and increasing odds of a recession, combined forces to give the bears the upper hand. Considering the ever-worsening economic numbers, any rebound may be short-lived, but opinions also abound that the sell off was way overdone.

For sure, rebounds or rallies into the end of any quarter occur with great regularity, which means we’ll have to wait till July to get a better handle on whether this is simply a dead-cat-bounce or a true bottom. I believe it’s the former and not the latter.

Looking at economic numbers, you must wonder what drove today’s rally. Existing Home Sales tumbled to a 2-year low, according to ZeroHedge, with the NAR warning that “worse is to come.”

Adding to that negativity was a deteriorating Chicago’s National Activity index. As a result, we can see that the Economic Surprise index keeps worsening. Bond yields were mixed with the 10-year adding 6 bps to close at 3.30%. The US Dollar slid, but it was not enough to lend support to gold, as the precious metal lost -0.42%.  

In the end, today was simply a reprieve for the buy-and-holders, but keep in mind that one bullish day does not indicate a directional trend change.

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.