Beckton Dickinson gets a shot in the arm

Stocks had another mixed close yesterday as interest rate speculation spun up. Bond yields are rising, and so are bets of another rate hike in May.

Voice of decent?  As we approach yet another key economic number (this morning) and another FOMC meeting just weeks away, that uneasy feeling is beginning to descend on the markets. You won’t find proof of that in the equity markets which have largely traded sideways these past few weeks… if you remove the brief bank-sector stomach virus in March. The Fed has, indeed, signaled that it has shifted into a wait-and-see mode in its actions but not so much in its words. That has left much room for speculation about interest rates… in the fixed income markets, which have been far more active in recent weeks.

Treasury note yields in both 2-year and 10-year tenors have pulled back since the beginning of the year indicating that bond traders expect the Fed to temper its hiking. But if you look at the charts, the pullback was certainly not a straight line. This shows that while traders generally expect the Fed to slow its hiking, there is still quite a bit of speculation on when. The recent banking sector gaffe saw a marked pullback in yields as traders speculated that the mess would force the Fed to abandon its assault. Indeed, the 2-year Treasury note yield dropped by more than a full percentage point in mid-March. Since then, the 2-year yield has bounced wildly around 4.00%. If we look at that in the simplest way, bond markets expect the overnight rate to be -100 basis points lower in 2 years, when less than a month ago, those rates were expected to be where the Fed’s target is today.

We can fine tune the market’s rate guess even further by looking at Fed Funds futures. Just around a month ago, the futures markets were expecting Fed Funds to be at 5.5% at year-end, that is +50 basis points above today’s target. Post-banking strife, that dropped to the 4% range, but has since climbed back to around 4.43%. That would mean -25 to -50 basis points below today’s rate.

While the markets may be right, it is clear that, based on what FOMC members have been saying in their public appearances, the path will not be a straight one. The Bank has shown that it is willing to risk economic damage by raising rates late last month in the fresh wake of the 2^nd and 3^rd largest bank failures in US history. Surely, FOMC members would have worried that their actions could cause further conflict, right? Well, we wouldn’t know that based on the Fed’s statement and policy. However, we may get some more clues on what members were thinking when we receive the minutes from the Fed’s March meeting, later today. Additionally, FOMC speakers have continued to make their cases for higher rates in recent days. However, if you look closely at the text, the positions have softened somewhat. Moreover, at least 1 voting FOMC member has voiced worry that higher rates could confound the banking system’s challenges. Now, that is far from a pivot, but it is something to note. While the fixed income markets have not been moved by this slight softening, equity markets have.

Futures have put a high probability of another rate hike either next month or in June followed by cuts later in the year. Despite the most recent rise in hike speculation, equity markets are holding their own, and rather than contemplating interest rates, stocks seem to be pondering a recession. Later this morning we will get a read of inflation in Consumer Price Index / CPI, which is expected to show that headline inflation pulled back to +5.1% from +6.0%. Core inflation, which does not include energy and food is actually expected to have increased to +5.6% from +5.5%. Indeed, there is lots of speculation swirling about the markets these days, but today, 2 fresh data points should anchor some of those… to make room for yet more speculation later this week when we get Retail Sales, Producer Price Index / PPI, and the start of earnings season.

WHAT’S SHAKIN’ THIS MORNIN’

Stocks are quiet in the premarket with index futures mostly unchanged as traders await this morning’s inflation number. Analysts are busy fine-tuning their ratings and estimates on stocks ahead of earnings season which begins in earnest this Friday. Those moves, as is typical, affect the movement of individuals stocks. Examples of early movers are Global Payments (GPN) which is higher this morning on a Goldman Sachs upgrade, and Beckton Dickinson (BDX) which is also higher after a KeyBanc upgrade. Similarly, an upgrade on target raise by Scotiabank had shares of Realty Income Trust (O) on the climb in the premarket.

­YESTERDAY’S MARKETS

Stocks had a mixed close yesterday as traders positioned themselves for today’s CPI release and listened carefully to Fed speak. The S&P500 was unchanged, the Dow Jones Industrial Average inched higher by +0.29%, the Nasdaq Composite Index slipped by -0.43%, and the Russell 2000 Index advanced by +0.80%. Bonds declined and 10-year Treasury Note yields were unchanged at 3.42%. Cryptos climbed by +2.28% and Bitcoin added +3.60%.

NEXT UP

• Consumer Price Index / CPI (March) may have eased to +5.1% from +6.0%.
• FOMC Meeting Minutes (March 22) will be released this afternoon at 2:00 PM Wall Street Time.
• Fed speakers: Barkin and Daly.