[Chart courtesy of MarketWatch.com]

1. Moving the markets

As we’ve witnessed for most of this year, surging bond yields have been the culprit to not only keep equities in check but also pull them off their lofty levels. Such was the case again today when the session got off to a bad start with the Dow dumping some 500 points right after the opening. The markets are having their worst start to a year since 2016, as ZH pointed out.

Adding to the sour mood was Goldman Sachs’ disappointing earnings report due in part to a 23% surge in operating expenses, which spanked their shares at the tune of -7%.

In bond land, the closely watched 2-year yield pierced the 1% level for the first time in almost 2 years. It has proven to be a reliable measure as to where the Fed will set short-term borrowing rates. Not to be left behind, the 10-year followed suit by touching its 1.86% level, also its highest since January 2020.

What that means is that the bond market is pricing in the announced aggressive policy tightening by the Fed, as well as their hawkish guidance. So far, they have not done anything other than spook the markets, and it remains to be seen whether they will follow through or simply leave traders and computer algos to deal with nothing but anticipation.

In terms of earning season, MarketWatch summed it up like this:

Overall, 33 S&P 500 companies have reported calendar fourth-quarter earnings thus far, according to Refinitiv. Of those companies, nearly 70% posted bottom-line results that beat analyst expectations.

The US Dollar extended recent gains but pulled back into the close, while gold chopped around and only ended slightly lower.

While our TTIs (section 3) remain on the bullish side of their respective trend lines, one of our holdings has broken clearly through its trailing sell stop and will be sold, unless a rebound materializes tomorrow.

There was no place to hide during today’s drop, and it looks like further bond yield spikes could deflate this equity bubble even more and eventually send us to the safety of the sidelines.

[Chart courtesy of MarketWatch.com]

1. Moving the markets

An early pump ran into strong resistance with the major indexes suddenly reversing and even breaking their respective unchanged lines to the downside. Fortunately, dip buyers stepped in and saved the markets from closing in the red.

The much-anticipated Consumer Price Index (CPI) showed an amazing 7% YoY ramp, which was in line with expectations, despite it being the biggest jump since 1982. It also has the dubious distinction of representing its 19^th straight monthly rise.

ZeroHedge drilled down a little further and reported that the Services inflation rose to 3.7%, it’s highest since January 2007, while Goods inflation soared 10.7% YoY, its highest since 1975. All this in the face of real hourly earnings falling (down 2.4% YoY) for the 9^th straight month. Ouch!

Given the above, it came as a surprise to see bond yields slide a tad, as an opposite reaction would have been a more appropriate move, especially after the Fed’s main mouth piece went into hawkish mode:

• Fed’s Bullard: Four Rate Rises in 2022 Now Appear Likely –WSJ
• Bullard: 2021 Liquidity Can Be Removed With Likely Little Disruption –WSJ
• Bullard: Early Start to Rate Hikes May Avoid More Hawkish Rate Path –WSJ
• Bullard: March Rate Rise Is Very Likely Amid High Inflation –WSJ

The weakness in bond yields was followed by a dump in the US Dollar, both of which combined forces to keep the gold rally alive.  

Earnings season is on deck and will start tomorrow with the big banks releasing their report cards. I’ll be back on Friday with the week-ending commentary.

[Chart courtesy of MarketWatch.com]

1. Moving the markets

The major indexes built on yesterday’s comeback rally with the Nasdaq again taking the lead by gaining 1.41%. Still, the markets are struggling to find some footing after the New Year’s sell-off.

Rising interest rates have been the culprit that brought the Santa Clause rally to a standstill and a subsequent reversal. For a change, the voracious rise in bond yields slowed down with the 1-year ending the day at 1.75% giving equities a reprieve.  

Fed head Powell testified before a Senate committee this morning as part of his re-confirmation process. He expects supply chain issues to normalize, which should mitigate inflationary pressures this year, and that he would not be afraid to hike rates further than intended should inflation remain high.

The markets took that as a rally cry, because of what he did not say, namely that the words “accelerated changes in policy,” above and beyond of what they already had indicated, were missing.

As a result, the bulls roamed freely and turned a weak opening into a ramp-a-thon with broad gains across the entire spectrum. Both, “value” and “growth” rallied in unison with SmallCaps outperforming. Of course, a continued short squeeze did its part of lending bullish support.   

Easing yields sent the US Dollar lower and gold higher, with the precious metal scoring a chest-pounding advance of 1.33% thereby ending solidly above the $1,800 level.

This tweet below made me laugh out loud because it sums up the relationship between the markets and the Fed:

A tip of the hat to ZH for pointing towards this bon mot.