Emotional equities and practical bonds

Stocks rallied yesterday as investors decided that it was time to buy the dip… and they did it broadly and in a big way.  It’s monthly jobs day today but yesterday’s weekly jobs numbers beat expectations… the Fed will be watching closely.

N O T E W O R T H Y

Oh Omicron?  Stocks have been on quite the rollercoaster over the past week since Omicron was added to the lingua franca of the markets.  It’s not that we expected a new strain of the virus but, in a way, perhaps we did.  Would this strain be more deadly?  Would it be more transmissible than Delta, already considered highly contagious?  Most importantly, would this new strain derail the global recovery with 2020-style lockdowns?  Well, it has been about a week since the markets first began to consider these questions.  Though the answers are not yet clear, the discovery of the new strain appears to be slowly getting absorbed into the market.  Perhaps even more worrisome to the market is the new virus which has struck the Federal reserve.  The virus apparently causes Fed members to recognize the devastating, and perhaps, longer-lasting effects of inflation.  The most notable symptom causes doves to act in a hawkish manner.  Perhaps you missed it, or just don’t want to believe it, but yes, the Fed has shifted its tone… and it is hawkish.  This morning I am writing my note from my son’s apartment, so I am unable to take an inventory of the hawks that inhabit the small woods behind my garden.  Despite this, I am quite sure that they are there… in numbers.  Earlier in the week, I had filed my morning note and took a few minutes to gulp down a cup of coffee before making my way into the office.  As I did, I spied through my window a handsome hawk perched on the fence on the side of my house.  Now, this is not normal for the hawks, which typically prefer a higher vantage point.  Also atypical was that the hawk remained for a long time, allowing me to ogle over it, snap a bunch of pictures, and even rustle up what family members I could, to catch a glimpse of the beautiful fowl.  Also, earlier this week, Chairman Powell made it quite clear that the Fed is growing increasingly concerned about inflation.  He even used the word “should” instead of “could” in his prescription for the Fed’s taper tempo increase.  That is a strong word for a Fed Head who is a master of wordsmithing.  What’s more, Powell even doubled down in his second day of testimony.  Clearly this was not missed by the equity markets as they wavered up, down, to, and fro… mostly down though… until yesterday when stocks staged an impressive and broad rally, in defiance of the Omicron-variant and the specter of earlier rate hikes.  The bond market, which is far less prone to emotional outbursts sent us some clear signs this week as well.  The treasury yield curve has flattened considerably.  This is evident in the spread between yields of the 2-year note and the 10-year note, which is now just around +80 basis points.  That happens to be right around where it was at the start of 2021 before it steepened substantially to around +157 basis points, reflecting an economic recovery.  The curve flattening was accomplished by a steep rise in 2-year yields combined with a pull back in 10-year yields.  This happens when investors are anticipating rate hikes.  Shorter maturity yields go up to compensate for near-term inflation and the Fed’s hikes, while longer maturity yields come down, forecasting lower, long-term inflation and slower economic growth resulting from the Fed’s brake pumping.  Today all eyes will be on the monthly employment figures, out this morning.  A stronger than expected number, while good for the economy, might be perceived as giving the Fed another pass to speed up tapering to clear the path to rate hikes.  As I look out of my son’s window this morning, I can see no hawks taking wing, but I have counted a number of corporate helicopters lifting off to ferry eager businesspeople to and fro.  The ups and downs, we will leave to the market.

THE MARKETS

Markets rallied sharply yesterday as investors rushed in to buy the dip.  The S&P500 rose by +1.42%, the Dow Jones Industrial Average climbed by +1.82%, the Nasdaq Composite Index increased +0.83%, the Russell 2000 Index traded up by +2.74%, and the S&P500 ESG Index added +1.31%.  Bonds slipped and 10-year treasury yields rose by +4 basis points to 1.44%.  Cryptos slipped by -0.22% and Bitcoin gave up -0.22%.

NXT UP

• Non Farm Payrolls (Nov) are expected to show an increase of 550k jobs, higher than last month’s 531k figure.
• Unemployment Rate (Nov) is expected to come in at 4.5% compared to the prior reading of 4.4%. 
• ISM Services Index (Nov) may have fallen to 65.0 from 66.7.
• Factory Orders (Oct) are expected to have grown by +0.6% after rising by +0.7% in the prior month.
• Next week: Some more earnings as the season winds down along with JOLTS Job Openings, Consumer Price Index, and University Of Michigan Sentiment.  Check back on Monday for calendars and details.