Even if stock investors are acting as if nothing happened along the road they are walking, they will soon wish they had not missed the obvious.
Yesterday when stocks crashed hard, I wrote the following caveat to their epitaph:
Whoa! Delusions broken. At least, for today, but give investors a wisp of faint hope tomorrow, and greed may go from free fall to free floating again.
Indeed, the faintest wisp was all they got in today’s PCE inflation report, but that was all it took to send them deliriously positive in a state of euphoria and denial again. That won’t likely last long, foolish as it is, because the road is likely to be more than bumpy from here on out on the inflation front—more like jagged—and because bond investors today refused to give up the tougher edge they took yesterday with the bond vigilantes holding out for better returns. Never underestimate the foolishness and denial that undergirds this stock market, causing investors to miss the obvious signs on each side of them.
… Because, as I also wrote yesterday …
The 2YR yield is now getting very close to 5%. At those levels Treasuries will be seriously sucking money out of stocks for the practically free ride of doing nothing but sitting home with zero risk and clipping interest coupons. Those days won’t be long in coming.
That is what we saw today in bond action as yields continued to rise. A few articles in the news today highlighted how bond traders are now demanding higher yields from US Treasuries and not letting go of the reins. For bond traders, today’s inflation report deeply reinforced the concerns that hit them yesterday, which is what the report should have done to stock traders, too, if they had any sense. Here is a summary of the smart action from bonds over the inflation reports of the last two days:
Bond Traders Are Preparing for a 5% Yield, No-Rate-Cut World
Bond traders are readying for 10-year US Treasury yields surpassing 5% as the scenario of no interest rate cuts by the Federal Reserve this year looks increasingly possible.
Schroders Plc is shorting US bonds across some tenors as sticky inflation raises the risk of higher-for-longer rates. Pacific Investment Management Co. expects the Fed to ease policy at a more gradual pace than peers in other developed markets, with a “non-negligible” chance that it doesn’t cut at all this year.
… the US two-year yield briefly exceeding 5% for the first time since November, and 10-year yields touching 4.58% after topping 4.5% in the previous session for the first time this year.
The moves underscore a rapid shift in the global bond landscape where just a few months ago, the dominant view was for six quarter-point cuts starting in March. The chorus of bond bears is getting louder after Treasuries suffered their biggest one-day loss since August 2022 as a key US price index beat forecasts for the third straight month….
To some, the current inflation trend echoes what transpired in late 2021, when price pressures proved persistent and laid the groundwork for the Fed’s hawkish pivot. Back then, central bankers initially played down a spike in inflation as transitory, only to months later embark on the steepest hiking cycle in decades.
“That’s been clear today as well, with investors pushing out the likely timing of rate cuts until later in the year, and pricing in a more hawkish policy stance ahead,” said Jim Reid, Deutsche Bank AG’s global head of economics and thematic research in London.
So, some ugly action in bond world there, tightening up finances quickly and calling it a “treasury rout.” The same thing could be seen in the US Treasury’s auction of the long 30YR bond today. Without going into the granular detail that can be found in the article below, the internal dynamics of the auction were pitiful. The yield on the auction climbed from the rate when issued, and ended up 34 basis points higher than the last auction of this kind. That’s some bad juju. The number of interested bidders dropped to the lowest since November when Powell’s loose and flappy lips first undid all the tightening the Fed had managed to work into financial markets. While the article comments on the oddity of how the 10YR yield actually dipped by the end of this auction, that oddity didn’t last minutes past the writing of that article before the 10YR returned to an even higher yield. Foreign demand also fled. So, yields will be pressed higher until greater numbers of bond traders are comfortably fleeing the stock market to chase the higher yields and sit back and interest clip coupons.
Stocks, on the other hand, took advantage of this tightening demand by bond traders and rose across the board, led by the usual tech stocks. But what about the inflation numbers that drove today’s action in bonds, but which stocks ignored? I’m going to have to save that more time-consuming deeper analysis for my Deeper Dive this weekend, “The Apoceclipse: We Survived” because that is the most important data of all that got totally eclipsed by stock moves today, but it is exactly what stocks should have focused on, just as bond investors did focus on it. (And we’ll have a little fun with some of the craziness on the actual eclipse scene that happened on Monday.)
There were some ugly numbers buried in the deepest parts of those reports that speak very loudly of a long and worsening inflation fight ahead, about which some mainstream financial writers today said “the Fed risks relearning the painful inflation lessons of the 1970s.” Yes that is where it looks like we are going, and almost all Fed heads in the news below today said today’s inflation report certainly makes them less likely to lower rates this year or, in the very least, to lower them anytime soon. It was practically a chorus of concerns within the Fed that stocks chose to ignore.
Ah well, to their own peril then because several more writers are now saying in today’s news that the Fed’s next move may actually have to be tightening in order to avoid that peril experienced in the 70s. Obviously with today’s stock action, the Fed still has work to do just to get financial markets back to being as tight as they were before Powell’s flappy lips undid the Fed’s hard work, though the bond vigilantes are working hard now at getting their side of financial markets back to where they were at the end of last October.
Things are shifting, whether stock investors are smart enough to realize the tectonic movements around them yet or not.