Stocks had a mixed close on Friday as bond yields and interest rates attempted to factor in future policy moves. Japanese yields popped briefly after a new hawkish BOJ head was named… US yields took notice.
Looking back – looking forward. Last week presented us with some interesting pivots for the market, although not the pivots stock traders were hoping for. A steady torrent of hawkish Fed talk finally put stocks in that uncomfortable place that they would like to see it in. Prior to last week all markets appeared to be defying the Fed’s talk that more rate hikes would be coming and that possibility of rate cuts, or a pivot, should not be counted on. Those were not the Fed’s exact words, but the policymakers did make it rather clear, that for now easy money is far off. It wasn’t a new message. I have been writing quite a bit how the market has been fighting the Fed, which is one of the first things we are taught not to do when we first arrive on Wall Street. Let’s just say that the stock market was attempting to manifest some good times. Bond markets are typically less emotional about things and are often more in sync with the economy and Fed policy. However in this case, the bond market too was challenging Fed members and their projections. Finally, futures traders, who have no time for chitchat or innuendos, put their money where their collective mouths are. Futures were also doubting the Fed’s threats to raise rates further and keep them there for a while. Futures markets were factoring in a 1 more +25 basis point hike followed by cuts through the end of this year.
How long could that madness last? Not for long. It all changed last week. Bond yields rose! 2-year Treasury Note yields jumped, starting last week off around 4.47%. Yields on that note attempt to determine Fed Funds in 2 years and are closely tied to policy. In just the prior week those same notes were around 4.10%! Change of heart? No, more likely a reality check. The 2-years closed the week out right around 4.5%. Futures also got the memo and quickly factored in a minimum of another ½ percentage point with a 42% change of another ¼ point bump mid-summer. Though futures are still defiantly expecting rates to come off their highs for the year, the market is now factoring an ending rate of 4.91%, up from 4.5% at the start of the week. The Fed’s overt jawboning of the market had finally taken root.
That brings us to stocks. One would think that stock traders would be focused on earnings season, which was thick with announcements last week. On a high level, those were not great. Lots of complaints about macro headwinds leading to diminished sales. Layoff announcements certainly outnumbered stock buyback announcements. Energy sector companies seemed to be the only ones popping bottles… though you probably knew that. Earnings, so far, as a whole appear to be down for the quarter. Though earnings season will begin to wind down this week, the message seems quite clear. The Fed’s policy is hitting its mark. Stock traders had their eyes on the bond market last week. Rising bond yields spooked the growth and tech stocks that drove the year-to-date rally in the indexes. Yes, those stocks are more sensitive to interest rates for various reasons, but moves in the indexes appeared to be more reactive, given recent rallying and despite weak earnings. Now that all that is on the table, investors will have to decide what impacts, if any, all those yield and rates adjustments will have on their holdings… you know, the proactive approach. Expect the Consumer Price Index / CPI, out tomorrow,to set the tone for that. In addition to the CPI, there is a steady stream of housing and economic data which should provide plenty to think about. The parade of Fed speakers also continues this week, if you can avoid looking up in the sky for extra terrestrial spy balloons, you should bend an ear to the policy makers, but don’t expect them to change their hawkish tone.
LAST FRIDAY’S MARKET
Stocks had a mixed close last Friday as higher yields weighed heavy on the tech-heavy indexes. The S&P500 rose by +0.22%, the Dow Jones Industrial Average climbed by +0.50%, the Nasdaq Composite Index pulled back by -0.61%, and the Russell 2000 Index advanced by +0.18%. Bonds declined and 10-year Treasury Note yields inched higher by +7 basis points to 3.73%. Cryptos lost -1.98% and Bitcoin gave up -1.45%.
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