1. Moving the markets

The morning, after the Fed’s announcement that it envisions two rate hikes in 2023, thereby subtly admitting that inflation may not be transitory, traders were shocked to see today’s market reaction, as this chart demonstrates.

ZeroHege described it this way:

Traders are watching in stunned amazement at what is going on in the market where contrary to everything the Fed has said, we are seeing a stampede into tech, growth, and duration-sensitive names…and a flight out of reflation and value sectors…

Bonds were in a world of their own when, after yesterday’s yield spike, which represented a normal reaction to potentially higher rates, opposite day arrived and slammed yields lower back down to the June 11 level. The 30-year yield crashed down to a price last seen on November 20.

Huh? Even seasoned traders watched this unreal development open-mouthed and were not able to come up with a reasonable explanation. Bank stocks got hit hard, which pushed the Financial Sector ETF down -2.90%. The US Dollar surged for the 5^th straight day, as ZeroHege pointed out, thereby clubbing Gold like a baby seal, which slumped -4.68% and dropped below its $1,800 level. Ouch!

It was a day where nothing made sense and even the inflation-sensitive commodity sector got annihilated and suffered its biggest drop since March 2020. In other words, things that should not have happened did happen.

In the end, it may not have been the Fed causing havoc in some market sectors, but what is about to take place tomorrow. That is massive options expirations in SPX and QQQ with a total value of some $2 trillion!

What we saw today may have been just a front run of tomorrow’s main feature.

1. Moving the markets

Despite the Fed leaving interest rates unchanged for the time being, it was the outlook that disturbed the bulls today. Inflation expectations were raised to 3.4% for 2021, which is 1% higher than the March projection.

The time frame as to when rate hikes might occur was moved to 2023, during which two increases are now projected. That came as a surprise after March’s announcement that such action may not be on deck until at least 2024.

The broad market dumped, including all 11 S&P sectors showing red numbers at one point, and there was no escape to safety. Apparently, beliefs were that the Fed would sit on its hands, so today’s hint that rates will need to rise sooner and faster, came as a surprise.

Regarding the Fed’s monthly $120 billion bond buying program, designed to keep bond yields low and make debt service feasible, no changes were announced.

The fallout was instant, as the US Dollar surged and bond yields rose, which caused stocks to tumble and Gold to dive.

The big question is this one: “Can the markets absorb this news without much damage, or will sentiment favor the bears from hereon forward?”

We will find out over the next few days.

1. Moving the markets

As I posted yesterday, more of the same was indeed how this session turned out. Traders stayed away from making new commitments and, due to lack of buying enthusiasm, the markets drifted aimlessly ahead of tomorrow’s Fed announcement.

Although the major indexes wandered into the red, keep in mind that they are still within striking distance of new all-time highs, so this two-day slippage is meaningless.

Looking at the big picture, the tech sector surrendered yesterday’s gains, as “value” was favored over “growth” today, with RPV managing a +0.35% gain while Small Caps hit the skids by given back -0.98%.

On the economic front, retail sales for May fell 1.3%, worse than an expected 0.7%, and the Producer Price Index rose 0.8% vs. an anticipated 0.6%. While these numbers had a negative market effect, this was mitigated somewhat by the upcoming Fed meeting results due out on Wednesday.

Bond yields pretty much trod water, but the US Dollar broke out of its short-term sideways pattern and touched its June 4^th highs. As is the case when dollar rallies, Gold lost its luster for this session and gave back -0.30%.

Concluded ZeroHedge:

Finally, the dismal disappointment in retail sales today, combined with Empire Manufacturing’s miss, a worse than anticipated drop in homebuilder confidence, and a bigger than expected drop in business inventories, the US macro surprise index fell to its lowest since May 2020…

1. Moving the markets

Red numbers were the theme this morning with the Dow and S&P 500 hovering below their respective unchanged lines with the former showing far more weakness than the latter. Resisting the early bearish mood was the Nasdaq, which maintained its bullish position, built on it throughout the session and ended it with a gain of 0.74%.

With bond yields rising today, but having shown weakness recently, traders drifted away from “value” investments in favor of “growth”—at least for the moment. Looking at the big picture, today was another quiet one, such as we’ve seen recently, and which is a sign of June’s historical trading patterns.

Of course, several concerns are ever-present, like looming inflation and potential moves by the Fed. Investor sentiment will be influenced by the Fed’s two-day policy meeting with the results due out around noon on Wednesday.

Hopes are high that the Central Bank will not announce any changes, but any future forecasts for interest rates, the economy and the elephant in the room, inflation, could easily affect market direction.

At the closing bell, markets were flat, but a last 30-minute ramp pushed the S&P 500 into record territory by the tiniest of margins, with the index ending the day up a puny +0.18%.

The 10-year yield continued its bounce off last week’s lows and, in combination with the US Dollar’s holding on to Friday’s gains, kept Gold in check with the precious metal ending lower by -0.64%.

I expect more of the same until Wednesday noon, at which time the Fed will have hopefully clarified its near-term policy.