Stocks Taking Their Cue From Bonds

At the moment, 0.28% is all that stands between the S&P 500 recording its fourth straight losing week. That isn’t much cushion, yet the futures market suggests the S&P 500 will get a little more padding on its week-to-date gain when the opening bell rings.

Currently, the S&P 500 futures are up 17 points and are trading 0.4% above fair value, the Nasdaq 100 futures are up 48 points and are trading 0.4% above fair value, and the Dow Jones Industrial Average futures are up 101 points and are trading 0.3% above fair value.

Early sources of support include a drop in Treasury yields, gains in the mega-cap stocks, a better than expected Caixin Services PMI report out of China, and some relief action after the S&P 500 managed to find support yesterday at its 200-day moving average (3,940).

There isn’t any news basis for the drop in Treasury yields. The 2-yr note yield is down seven basis points to 4.84% and the 10-yr note yield is down nine basis points to 3.98%. The improvement is being attributed to a sense that Treasuries have gotten oversold on a short-term basis and are due for a bounce.

That same view came into play yesterday for stocks. At its low on Thursday, the S&P 500 was down 6.4% from its high on February 2. Not surprisingly, with a key technical support level in jeopardy, market participants latched on to Atlanta Fed President Bostic’s view that he is in favor of a 25 basis points rate hike at the March FOMC meeting as a reason to rally into the close.

It was an overreaction in our estimation knowing that Mr. Bostic is not an FOMC voter until 2024, and also knowing that he said the day before that he felt the Fed should get its policy target range to 5.00-5.25% and leave it there well into 2024, effectively ruling out a rate cut (in his mind) in 2023.

The market, though, spun Mr. Bostic’s view in a dovish way, operating with an understanding that the fear of a more aggressive Fed had already made its way into market pricing. Notably, Fed Governor Waller (FOMC voter) said right about the time the market was closing yesterday that the policy target range will have to be raised even more this year if job numbers and CPI inflation data stay hot.

The February Employment Situation Report will be released next Friday (March 10) and the February CPI data will be out March 14. Mr. Waller, then, seemed to be laying down the gauntlet for the market, which, at the moment, doesn’t appear to feel overly challenged by it.

That could possibly change today if the February ISM Services PMI (Briefing.com consensus 54.5%; prior 55.2%) shows an acceleration from last month in services activity and/or there is an added jump in its prices index.

This report will be out at 10:00 a.m. ET and we suspect stocks will be taking their response cue from what happens in the Treasury market.

That is what they are doing at this point anyway while also digesting mixed reactions to earnings reports and/or guidance from the likes of Dell (DELL), ZScaler (ZS), Hewlett-Packard Enterprises (HPE), C3.ai (AI), Marvell (MRVL), Broadcom (AVGO), and Costco (COST).

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Originally Posted March 3, 2023 – Stocks taking their cue from bonds