Investors appear hesitant as they absorb the new interest rate narrative

Thursday’s warmer-than-expected comments from St. Louis Federal Reserve Chairman James Bullard sent stock and bond markets tumbling on a day when there seemed to be no safe haven. However, it’s a new day and investors seem open to a new narrative.

CPI deflates stocks

The bulls held on Thursday after a warmer than expected CPI inflation rose 0.6% m/m, which was above the 0.5% expected. It was also up 7.5% year-over-year, which was also better than expected at 7.3%. Economists were hoping for some easing in inflation with the holidays well behind us, but these are the hottest numbers since February 1982.

the fell to the open market in reaction to the news, but returned to Wednesday’s highs. However, after the market hit its highs, St. Louis Federal Reserve Chairman James Bullard told Bloomberg News in an interview just hours into the trading day that he wanted to see the federal funds rate to 1% by July 1. prompted investors to start selling stocks, and the SPX ended the day down 1.81%.

The sell off was wide with the decliners outpacing the advances by around 3 to 1. the fell 2.1%. And the fell 1.47%. Small cap stocks were able to hold their own for most of the day, but the eventually succumbed to the sell-off, driving the index down 1.55%.

Break the Bonds

Probably the biggest action of the day took place in the bond market. The IPC report led the up nearly 26 basis points to 1.609%. You will recall that the 2-year yield is the one that tries to anticipate the fed funds rate, which means that the bond market expects Federal Reserve aggressively tackle inflation. The federal funds rate is still at zero as the Fed is set to wrap up its stimulus bond buying program next month.

The rise in the 2-year yield also had repercussions on the entire yield curve. the climbed to 2.1% before falling back to close at 2.031%. Despite the rise in the 10-year rate, the yield curve measured by the 2s10s ratio flattened, falling below the 0.5 mark. At this point, there is about half a point of difference between the 2-year and 10-year yields.

The 10-year yield tends to be correlated to mortgage rates. According to Mortgage News Daily, the daily 30-year mortgage index is back above 4% for the first time since May 2019. fell 3.51% on Thursday on fears that rising rates could significantly slow the housing market. With trading around $1,200 per board foot and rates rising, the booming real estate market may finally be seeing some cooling.

A new day

This morning the 2-year Treasury yield fell to 1.557% as investors appeared to reconsider the news and its effects. With the move in the 2-year yield on Thursday, the CME FedWatch Tool had hit a 93.5% probability that the Fed would hike the fed funds rate by half a point in March, but it has since fallen to 77.3 %. This may be because other Fed members also commented on the rate hike. San Francisco Fed President Mary C. Daly said her preference was not a half-point hike, and Richmond Fed President Tom Barkin said he was “conceptually open to that”. Currently, the market seems to be pricing in five rate hikes in 2022, but Goldman Sachs (NYSE:) changed its forecast overnight to seven hikes.

the Cboe market Volatility Index () had moved nearly 5.5% this morning, but is back down to less than 1%. At the same time, the S&P500 and had fallen overnight but are now flirting with positive territory. Additionally, investors have plenty of earnings announcements to sift through, although there aren’t many stocks capable of moving the markets. Still, there is a lot of interest.

Before opening, Dominion Energy (NYSE:) surprisingly missed earnings and revenue. With energy being the hottest sector, Dominion appears to be a bit overwhelmed as it was down just 0.61% in premarket trading. Additionally, oil prices were back above $91 a barrel before the opening bell.

sportswear company under protection (NYSE:) posted better-than-expected earnings but is down 1.5% in premarket trading. Despite higher estimates, UA said rising freight costs were hurting its margins. Additionally, the company is experiencing supply chain issues that have led it to reduce its backlog for spring and summer.

After closing on Thursday, Expedia (NASDAQ:) rose 5.83% in response to the release of better-than-expected earnings despite no revenue. EXPE said it expected a “brighter year” and that the Omicron variant was not as big of a disruption as many had predicted.

genomic sequencer Illuminated (NASDAQ:) reported that it significantly beat earnings estimates on the back of a 26% increase in revenue. The company rose just 0.18% in after-hours trading.

One company that reminded me of the power of social media and its connection to revenue was To assert (NASDAQ:). Affirm actually rose 12% after some of its key earnings metrics were accidentally leaked on Twitter (NYSE:) ahead of its post-market timing announcement. The company reported a 218% increase in the number of transactions, which led to a 77% year-over-year revenue increase. The company went ahead and released the rest of its report, which actually led to a headline inversion. The AFRM ended the day down 21.42% as its earnings outlook was weaker than expected, and the company avoided questions about its future with Platoon (NASDAQ:).

Chart of the S&P Homebuilder Select Industry Index.

CHART OF THE DAY: TRIANGULATION OF MANUFACTURERS. The S&P Homebuilder Select Industry Index (SPSIHO—candlesticks) created a triangle pattern. Data sources: ICE, S&P Dow Jones indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Techniques on the triangles: My technical analyst friends tell me that triangle patterns tend to be continuation patterns, which means that if the stock rallies against the pattern, the breakout of the pattern will be bullish. If the pattern occurred after a downtrend, the breakout will also be down. However, this is not always the case, so technical traders can just focus on the breakout and not worry about the previous trend. Perhaps Friday will be a driving force in the breakout.

Show me the money: Whenever investors become big sellers in a particular asset class, it makes sense to try to figure out where they are moving their money. The general wisdom and the most often seen pattern is that when bonds fall, stock prices rise. Obviously, that’s not what happened today. But stocks and bonds rarely fall or rise over long periods of time. It therefore makes sense for investors to pay attention to which asset classes are moving over the next few days, as this could indicate where investors are buying and which asset classes are turning in favor.

Disclaimer: Commentary by TD Ameritrade® for educational purposes only. SIPC member. Options involve risk and are not suitable for all investors. Please read Features and Risks of Standardized Options.


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