[Chart courtesy of MarketWatch.com]

1. Moving the markets

Another head fake session saw the Dow gaining over 300-points early on, but the rally quickly lost steam with the major indexes briefly dipping into the red, before a late push saved the day. The Dow settled at about unchanged, but the S&P 500 eked out a modest 0.31% advance.

The early boost was a result of China rolling back some of its Covid restriction, which traders interpreted as their economy returning to near capacity within a month. That should be a boon to the global economy and would hopefully ease the supply chain issues.

Still, uncertainty abounds that the Fed might raise interest rates too fast and too much creating a recession in the process. Well, you can’t have it both ways, as the Fed has only limited options. Either fight inflation fast and furious and risk a recession, or be too easy and watch hyper inflation create havoc. Take your poison.  

Rate hike expectations climbed to its highest level since the May Fed meeting with bond yields ripping higher, as the 10-year added over 10 basis points to recapture the 3% level to close at 3.045%.

That helped the US Dollar to reverse its downtrend and wipe out early losses. Gold dropped on dollar strength and gave back its $1,850 level in the process. Unfortunately, gasoline prices hit another record high, as ZH reported, which appears to be now an almost daily occurrence.   

[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.