[Chart courtesy of MarketWatch.com]

1. Moving the markets

The highly anticipated Fed minutes turned out to be more hawkish than expected in terms of QT (Quantitative Tightening) and future rate hikes, which ZH summed up like this:

• As much as $95 billion in asset runoff per month ($60-90 bn expected)
• Many Fed officials say half-point hikes may be warranted
• Fed sees need to get to neutral posture ‘expeditiously’
• Fed fears public loss of confidence in is resolve over inflation

That pushed the Dow down some 250 points right after the opening with the other 2 major indexes following suit. While an afternoon comeback cut losses, the Nasdaq still took the brunt of the beating by losing 2.2% on the day.

All majors plunged below critical support with the S&P 500 dipping below its 200-day M/A and the Nasdaq heading towards its 50-day M/A.

None of the Fed’s mouthpieces helped matters, especially with NY Fed President Dudley posting this warning:

It’s hard to know how much the U.S. Federal Reserve will need to do to get inflation under control. But one thing is certain: To be effective, it’ll have to inflict more losses on stock and bond investors than it has so far.

That goes along with what Fed head Powell has said (Hat tip ZH for this bon mot):

Financial conditions need to tighten. If this doesn’t happen on its own (which seems unlikely), the Fed will have to shock markets to achieve the desired response. This would mean hiking the federal funds rate considerably higher than currently anticipated. One way or another, to get inflation under control, the Fed will need to push bond yields higher and stock prices lower.

The Fed can’t get clearer on its intentions than the above. However, should markets dump, the question remains whether they will override their desire of seriously fighting inflation, or will they succumb to bailing out equities like they did the end of 2018?

Bond yields jumped with the 10-year touching 2.65% intra-day, a high from which they backed off to close at 2.601%. The US Dollar gained a tad, and so did gold.

Once the actual rate hikes and QT implementations take place in May and June, it should become clear, even to those with blinders on, that these events will not be a positive for stocks.

[Chart courtesy of MarketWatch.com]

1. Moving the markets

While we saw a benign opening, things went south for the broad markets, as Monday’s theme of climbing a wall of worry was short lived with the major indexes giving back more than they gained yesterday. It brought back of thoughts as to whether this chart indeed is showing a topping formation.

Downward momentum accelerated in the last hour when Fed mouthpiece Brainard, a more dovish Fed member, opined that a more aggressive approach to the Central Bank’s policies might be in order.

Mark Zandi, chief economist at Moody’s Analytics, assessed the situation with much realism:

“Ultimately, the way this is going to work, the economy is going to slow, the stock market has to reflect that. So, I do expect the stock market to have a tough few months here as it ultimately adjusts to what the Fed is doing and will do going forward.”

That view went right along with Deutsche Bank’s statement forecasting a recession ahead, the first major Wall Street bank to do so.

Bond yields exploded to the upside with the 10-year adding 15 bps to end the session at 2.555%. Ouch! That crushed bond holders again with the widely held TLT getting clobbered at the tune of -2.26% bringing its YTD loss to -11.29%. We have now reached the highest yields since 2018.

“Value” outperformed “growth” and yesterday’s market savior, namely the seemingly ever-present short squeeze, was absent today giving the “most shorted stocks” an opportunity to do what they do best: go lower.

The US Dollar headed higher, causing Gold to dip moderately.

In the end, ZH summed it up well by questioning the validity of this recent rally in the face of 9 more rate hikes this year. Graphically, it looks like this.

Hmm…

[Chart courtesy of MarketWatch.com]

1. Moving the markets

Despite a negative news environment, traders ignored most of the headlines and the fact that US factory orders tumbled in February and scored their biggest drop since April 2020.

Also sounding a word of caution was this chart (hat tip to ZH) suggesting that the March melt up, AKA a short-cover rally, may be showing some momentum fatigue and nearing its end with most shorts now fully covered thereby eliminating them as a future driving force—except today, when they suddenly came to life again.

None of the above mattered, as the major indexes seemed to climb a wall of worry by ending the session with solid gains led by the much beaten-up tech sector, sort of a relief rally.

Equities and bonds are still sending diverging indications about the economy, which look to be depending on the headline news of the day, as yield curve inversions are pointing towards a recession, while cease-fire talks in Ukraine appear to change by the moment. Both are contributing to market- and economic uncertainties, but they should not be over-analyzed on a day-to-day basis.

With “value” having had the upper hand YTD over “growth”, today was opposite day, with the latter outperforming the former, which allowed the Nasdaq to be the top dog for this session. Even the “unprofitable tech stock basket” managed a long overdue rebound.     

Gold had a positive session, as did the US Dollar, which continued its upward swing for the 3^rd day in a row.

In the end, it’s all about market expectations of rate hikes and future rate cuts, as this chart demonstrates.