Stickney Coop Elevator –
Reversing the Fed Moves?
Monica Kingsley of Monica Kingsley – InsideFutures.com – Thu Mar 18, 10:22AM CDT
Fed messaging was rightfully interpreted as dovish – full employment is in effect its single mandate now.
Yes, the central bank will tolerate higher inflation, and has prepped the markets for its advent (as if these didn‘t know already).
Powell managed to walk the fine line between economic optimism, pushback on the idea of raising rates or taper, and yet implicitly acknowledged the growing liquidity concerns with one little, gentle prod.
Markets naturally d the tone, overlooking no mention of action on rising yields, and stocks, metals and commodities turned positive on the day – quite strongly so. The dollar declined visibly as long-term Treasuries recovered intraday losses on high volume.
Highly charged finish to the day, but today‘s analysis will show that little has actually changed in its internals.
Rates are rising for the good reason of improving economy and its outlook, reflation (economic growth rising faster than inflation and inflation expectations) hasn‘t given way to all out inflation, and stocks with commodities remain in a secular bull market. We‘re in the decade of real assets outperforming paper ones, but that will become apparent only much later into the 2020s.
So, the central bank confirmed my yesterday‘s assessment of its tone and Treasuries take:
(…) I am not looking for the Fed to act today by adjusting its forward guidance stance or language, or taking a U-turn on inflation. No, they‘ll maintain the transitory stance even though markets are transitioning to a higher inflation environment already. The Fed won‘t do much this time.
They might not even talk about bringing down rates at the long end through a twist program. I certainly don‘t look for clues as to increasing the $120bn monthly pace of monetary injections.
Unless the market perceives the Fed as underplaying the threat of inflation and showing tolerance to its palpable overshoot, the overall mix of positions and conference statements might bring gold under renewed pressure as it meanders a little below $1,730 as we speak.
Long-term Treasuries … are weighing heavily on the markets. Stocks have gotten used to their message of rising inflation and economic recovery… – but it‘s the precious metals that are suffering here, showing best in the copper to 10y Treasury yield ratio.
For gold, the key question remains whether copper upswings will outpace any yield increases on the long end, which have moderated their increases in Mar compared to Feb.
That‘s good but not nearly enough given that even gold afficionados have come to expect lower prices lately quite en masse.
Sign of capitulation off which the upswing was born? Yes, and the key questions now are whether we‘re seeing a pause, or a top in the upswing, and whether the next selling pressure would break below the $1,670 zone or not – see my early March game plan.
The volume profile thin zone around $1,760 appears reach for now, without a Fed catalyst.
And while we got a good confidence building one yesterday, I don‘t see it as strong enough to power precious metals higher immediately. It‘s nice that gold is decoupling from the rising yields but I view its upswing as demanding on current and future patience.
Gold miners are still showing the way, and will be a key barometer in telling whether today‘s premarket downswing in antidollar, risk-on plays is a meaningful turn or not.
For now, the renewed long-term Treasury yield increases (and tech selloff to a degree) point to reemergence of lingering Fed doubts.
Let‘s move right into the charts (all courtesy of www.stockcharts.com).
S&P 500 Outlook
The upper knot in the S&P 500 upswing spells short-term caution. The chart posture would be stronger without it, but at the same time, the volume and candle itself aren‘t ones of reversal.
The most ly outcome of upcoming sessions still appears as resumption of the prior grind higher, which is in line with my yesterday‘s message of consolidation followed by new highs as the most ly scenario.
The long upper knot in the high yield corporate bonds to short-term Treasuries (HYG:SHY) ratio shows that the bond market isn‘t on board with the Fed – at a time when stocks aren‘t panicking in the least.
Given the big picture in the economy and the combo of monetary and fiscal policy initiatives, I look for this to be a storm in the tea cup when it comes to (higher future) stock prices, and I am keenly on the lookout for possible deterioration in the corporate bond markets as relates to the S&P 500.
Technology and Value
The tech upswing wasn‘t really convincing, but it‘s been value stocks‘ turn to drive higher S&P 500 prices. No change in dynamic here. It‘s however the relation to not as strong Russell 2000 or emerging markets yesterday that hints at headwinds in stocks for today. A play on patience, again.
Yesterday‘s Fed message gave no reason for these to decline, and prior uptrend continues unabated. Bond yields haven‘t though frontrunned them yesterday, which I however look to see changed today.
The gold ETF formed a bullish candle, tracking the rising miners well. But wise to the HYG:SHY ratio‘s upper knot message, this one is concerning as well.
The key question is about the staying power of GDX outperformance – the key argument for the gold market character having changed with the Mar 08 bottom, which might very well be THE bottom, and not a local one.
The decoupling of the yellow metal from rising yields is even more visible now than when I first showed you the weekly $GOLD – TLT overlay chart two weeks ago.
Platinum goes down while the copper engine runs (and silver did join in yesterday). This chart sends a message of short-term indecision extending to other commodities, including oil.
S&P 500 is in my view merely testing the buyers‘ resolve, and doesn‘t want to turn the consolidation on declining VIX into a rush to the exit door. Despite the surprisingly early turn against the Fed day move, this doesn‘t represent a trend change or arrival of the dreaded steep correction. The stock market bull is very far from making a top.
Gold is again under pressure today, back in the $1,730 zone instead of having cleared it. Understandable given the dollar and Treasuries reversal of yesterday‘s Fed moves, but not rushing to the downside head over heels.
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Dow, S&P 500 erase sharp losses to end higher as Powell pledges Fed support for economy through COVID crisis
The Dow and S&P 500 eked out gains in the final hour of trade Tuesday, while the tech-heavy Nasdaq Composite finished modestly lower, after congressional testimony from Federal Reserve Chairman Jerome Powell helped reverse a market selloff tied largely to a sharp rise in bond yields.
The Fed boss, during the first of two days of testimony in Washington, vowed to keep monetary policy accommodative, and warned that the U.S. economic recovery remains uneven and far from complete.
On Monday, big losses for tech shares left the Nasdaq more than 2% lower, while also weighing on the S&P 500. The S&P 500 suffered its fifth straight loss, the index’s longest losing streak since a seven-day skid that ended last Feb. 28. The Dow benefited from a rotation to more cyclically oriented stocks, eking out a gain of 27.37 points, or 0.1%.
Stocks erased earlier losses in afternoon trade, after Powell told lawmakers on Tuesday that the central bank doesn’t expect to shift its accommodative policy stance until a lasting economic recovery can be achieved.
Powell, in testimony before a Senate panel, gave no indication that rising bond yields or inflation expectations would rush the Fed to begin reining in its efforts to support the economy.
Recap: Fed Chairman Powell’s testimony to Senate Banking Committee
Instead, the Fed chairman again emphasized that he doesn’t expect a “large or persistent” rise in inflation, even as trillions worth of stimulus slosh through the economy and swaths of the population line up to get vaccinated.
“We will be watching that very carefully,” Powell said of inflationary pressures.
But he noted that the “economy is a long way from our employment and inflation goals, and it is ly to take some time for substantial further progress to be achieved.
” He described the recovery as “uneven” and “far from complete,” while saying the path ahead remained “highly uncertain.” But Powell also acknowledged that “developments point to an improved outlook for later this year.”
A sharp rise in Treasury yields, which partially paused Tuesday, has captured the attention of investors, spelling trouble for tech and other previous highfliers. Rising yields make bonds a more viable alternative to stocks, particularly those that have seen their valuations stretched.
“That’s certainly a concern in the market,” Yung-Yu Ma, chief investment strategist for BMO Wealth Management, told MarketWatch in an interview, adding that while Powell made clear he doesn’t expect inflation to “change on a dime,” that inflation in today’s environment could play out differently from the past.
“It’s somewhat new territory we are wading into, given the size of the stimulus,” Ma said. “That’s what the markets are contending with.”
Shares of companies more dependent on the economic cycle have benefited, buoyed by expectations for a pickup in growth as the economy more fully reopens courtesy of aggressive fiscal stimulus, vaccine rollouts and falling COVID-19 cases.
Read: Climbing bond yields globally put central banks ‘in a bind,’ warns economist
Meanwhile, rising yields progressively have made bonds viable alternatives to stocks, especially equities that led the market higher after the onset of the COVID crisis, said Scott Knapp chief market strategist at CUNA Mutual Group.
“While very early in a process that has no guarantee it will continue, market sentiment is moving from ‘there is no alternative to stocks’ to ‘stocks look the less-attractive alternative,'” he said. “Only time will tell if markets stay on this path.”
At the same time, with the benchmark 10-year Treasury yield currently near 1.4%, government debt still could be a tough play for yield chasers in a 2% environment for inflation.
In One Chart: Can the bull market in stocks survive rising inflation, bond yields? Here’s what history says
On the fiscal front, the House Budget Committee on Monday approved a $1.92 trillion bill to carry out President Joe Biden’s coronavirus relief plan, a first step toward ly House passage by the end of the week. While the ultimate package is ly to shrink, analysts expect its final price tag to come close to Biden’s $1.9 trillion proposal.
Read: Should I buy bitcoin? Why the cryptocurrency is on the verge of a bear market
The S&P CoreLogic Case-Shiller home price index showed house prices rose 10% in December. The Conference Board said its index of consumer confidence rose to a three-month high of 91.3 in February from a revised 88.9 in January.
Which companies were in focus?
- Snap Inc. SNAP, -1.44% shares shot 11.1% higher Tuesday, after the social-media company’s executives detailed their plans for Snapchat in an investor presentation.
- Shares of electric-vehicle maker Tesla Inc. TSLA, -0.72% fell 2.2% as bitcoin dropped sharply.
Tesla earlier this month revealed that it had bought $1.5 billion of the cryptocurrency.
- Shares of Wells Fargo & Co. WFC, +1.18% fell 0.3% after the bank announced an agreement to sell Wells Fargo Asset Management to private-equity firms GTCR LLC and Reverence Capital Partners LP for $2.1 billion.
- Palo Alto Networks Inc. PANW, -1.49% shares fell 1.7% after the cybersecurity company’s quarterly earnings outlook range fell short of the Wall Street consensus late Monday, while beating estimates for the previous quarter.
- Home Depot Inc. HD, +0.93% shares lost 3.
1% even after the home improvement retail giant reported fiscal fourth-quarter profit and sales that rose above expectations and boosted its dividend by 10%.
- Shares of Macy’s Inc. M, +2.01% gained 3.9%, reversing an earlier loss, after the department-store retailer topped fourth-quarter expectations.
- Software-as-a-service company ZoomInfo Technologies Inc. ZI, +1.84% announced fiscal fourth-quarter results late Monday that beat expectations. Shares rose 4.1%.
- Shares of RealReal Inc. REAL, +0.41% skidded 13.
2% after the e-commerce retailer of secondhand luxury goods late Monday delivered a wider quarterly loss and said that the pandemic had “temporarily disrupted” its path to profitability.
How did other markets perform?
- The yield on the 10-year Treasury note TMUBMUSD10Y, 1.661% edged 0.7 basis points lower to 1.363%. Yields and bond prices move in opposite directions.
- The ICE U.S. Dollar Index DXY, +0.28%, a measure of the currency against a basket of six major rivals, was up 0.1%.
- Oil futures closed mixed, with the U.S. benchmark CL.1, +4.29% settling 0.1% lower at $61.67 a barrel. April Brent BRNJ21 rose 0.2% to settle at $65.37, a 13-month high. April gold futures GCJ21, +0.19% closed 0.1% lower at $1,805.90 an ounce.
- In overseas stock trading, the pan-European Stoxx 600 SXXP, +0.92% dropped 0.4% and London’s FTSE 100 UKX, +0.87% closed up 0.3%. The Shanghai Composite SHCOMP, +1.63% fell 0.2%, while Hong Kong’s Hang Seng Index HSI, +1.57% rose 1%.
- Bitcoin BTCUSD continued to drop sharply from its high above $50,000 after Treasury Secretary Janet Yellen on Monday called the cryptocurrency an “extremely inefficient” way to conduct transactions.