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Bonds Realign with the Fed… Not Equities
From the first week of 2023 – bond markets were at odds with the Fed. For example, yields on the 2-year treasury plunged from 4.50% to barely above 4.0% over the past 6 weeks. And yet – the Fed were resolute in their resolve to keep raising rates. Something was amiss. Turns out that bond markets have pivoted and now see ‘eye-to-eye’ with the Fed that rates are staying higher for longer. Go figure. However, equities are yet to get the memo…. that’s risky.
S&P 500: ‘False Break’ Warns of Pullback
This week the S&P 500 performed a ‘false break’ of its previous 4100 high. Technicians see this as a reliable reversal signal. However, on the other hand, there are bullish arguments we can make. The mix of bullish and bearish technical signals make shorter-term ‘tactical’ trading very difficult (that’s not my game). Here’s how I’m thinking about it…
Bonds React to “Higher for Longer“
Bond markets (and the US dollar) appear to be reacting to the likelihood the Fed has ‘more work to do’ on bringing inflation down to its 2.0% target. For e.g., the US 2-year treasury has surged almost 50 bps the past couple of weeks on stronger than expected economic data (eg surging jobs and higher wages). Meanwhile, JP Morgan’s CEO – Jamie Dimon – said it’s too early to declare victory on inflation. What does this mean for stocks?
Market Refuses to Believe the Fed
The S&P 500 is optimistic on three things (a) avoiding a recession; (b) rapidly falling inflation; and (c) two rate cuts before the end of the year. And the market could be right. However, I think it’s optimistic. What’s more, they are choosing to fight the Fed.