Stockmarket Bulls Defiant As Bond Market Surrenders To Fed. Heres What To Watch.

The US bond market shone.

It took a while, but Federal Reserve Chairman Jerome Powell won a game in which traders had been reluctant for some time to predict a longer, higher rate hike in 2023.

But that didn't bother the stock market, which rallied strongly earlier in the year. Investors are wondering if this can continue.

What's happening

Feedback following the Fed's policy meeting on Feb. 1. Powell warned and repeated a message the following week that the Federal Reserve was ready to raise the federal funds rate above 5% and keep it at that level until 2023. low prices at the end of the year.

Then a flood of economic data began to emerge. The January job growth report on Feb. 3 was followed by CPI data on Tuesday, which showed that inflation continued to ease but looked tight in key areas. On Wednesday, he released much stronger-than-expected retail sales data for January.

The producer price index for January on Thursday also turned out to be warmer than expected.

And Cleveland Fed President Loretta Mester, who is a non-voting member of the Federal Open Market Committee tasked with setting rates this year, said she sees a "compelling" case for cutting the federal funds rate by half a percentage point amid the recent surge. meeting when the Fed announced a quarter-point increase.

All of this bolstered the idea of ​​a stronger-than-expected economy and spurred the Fed to do what it says it will do to bring inflation back to its 2% target.

Federal funds futures are now trading at "more than 50% chance of a rate hike in June, bringing the final rate to 5.375%." Three weeks ago, the likelihood of a rate hike was almost zero. interest rates in June,” said founder Tom Essay. From a research report by Sevens. In a note on Thursday ahead of economic data and Mester's comments, he noted: Expectations of lower interest rates towards the end of the year have largely evaporated.

Treasuries sold off, boosting yields, especially in the short term, as investors weighed in on short-term cuts. This week, 6-month Treasury yields topped 5% for the first time since 2007, while 2-year Treasury yields traded at their highest level since November and 10-month Treasury yields hit a new yearly high.

Stocks have come under some pressure since the major indices lost ground last week, but the 2023 rally remains in place. In addition, tech and other growth stocks, which tend to be more sensitive to rising interest rates and expectations of higher Treasury yields, outperformed the market overall.

Read: "The main rise of the tenor". According to Morgan Stanley's Andrew Slimon, US equities are performing surprisingly well as Treasury yields rise after higher-than-expected inflation.

With stocks falling on Thursday, the tech Nasdaq Composite continued its weekly gain of 2.5%, while the S&P 500 and Dow Jones Industrial Average were also positive for the week.

The stock market was "sunny, if not positive," said Quincy Crosby, chief global strategist at LPL Financial.

The resilience may reflect the view that the latest data gives investors confidence that the economy can withstand more aggressive rate hikes by the Federal Reserve, analysts said. There seems to be growing confidence in the economy that a so-called hard landing can be avoided in favor of a “soft landing,” or a moderate slowdown, or even no slowdown at all, which economists call a “no landing” scenario. . "...

Some market watchers believe stock bulls are heading for a recovery. Rising short-term Treasury yields narrow the S&P 500 dividend yield gap, making riskier stocks less attractive.

See: Stocks in 'Right' Markets Face 'Significant' Downside Risk; JPMorgan:

And a no-land scenario could cause problems because it would mean the Fed would have to raise interest rates even more than Fed policymakers and market participants are currently expecting.

Read: Top Wall Street The Economist says no-landing scenario could spark another sell-off in tech stocks.

The strong data bolsters expectations that the Fed will raise its forecast to a level at which the federal funds rate is expected to rise. Consolidated economic forecasts for December, known as the dotted line because it reflects individual policymakers' expectations of interest rate developments, point to a peak just above 5%. The dotted line will be updated when lawmakers meet in March.

Crosby said the market outlook could change significantly.

“The overall market message was that cyclical sectors, including technology, could continue to drive the market even higher as long as the market is supported by stronger economic growth,” Crosby said.

What could be a sign that equity investors are losing confidence?

“If the cyclical approach returns to a more defensive stance, and consumer staples take the lead again, it will be clear that expectations for a sharp economic downturn are higher,” Crosby wrote.

The Bank of Japan gave in and shocked the world.