[Chart courtesy of MarketWatch.com]

1. Moving the markets

After an early bounce, the markets got double punched via a variety of headlines that gave the bears the upper hand and allowed them to dominate this session.

We learned that “inflation is sticky and degrowth is not slowing it,” as well as a warning by JP Morgan’s Jamie Dimon that “it’s a hurricane. That hurricane is right there, down the road, and coming our way. We don’t know if it’s a minor storm or if it’s a Superstorm Sandy,” all of which left last week’s dead-cat-bounce in the rearview mirror.

Not helping was the known fact that today was the first day of the Fed’s QT (Quantitative Tightening) program, which will affect markets negatively. As a result, the major indexes tumbled off their morning highs, while bond yields spiked and the US Dollar jumped.   

An afternoon rebound effort failed with another dour outlook like “a soft-landing scenario is hard to achieve,” which was uttered by Wells Fargo’s CEO. Even the Fed’s Bostic clarified his previous comments that a “September pause” should in no way be interpreted as a “Fed Put.”  

In the end, Rate-Hike Expectations rose, with stocks, bonds and banks all closing in the red. Gold bucked the trend and, despite an up and down ride, ended the day in the plus by a small margin.

As ZH commented, the manufacturing surveys and the reduced Atlanta Fed’s own GDP forecast (revised down to +1.3%), as well as current inflation expectations, paint a picture that clearly screams “Stagflation.”

[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?