The markets are very sensitive to the Federal Reserve but have a habit of anticipating Fed actions. We have seen 3 cycles since 2022 when the markets rose based on anticipation of the Fed cutting the fed funds rate and being disappointed when the Fed held steady.
To the markets, good news is bad news when they see the Fed won’t have a reason to cut the fed funds rate. The employment report this past week was stronger than anticipated. If next week’s inflation report is higher than anticipated – if inflation doesn’t fall or even rises – the markets are likely to have at least a minor hissy fit.
The options market has already begun to factor in a delay in the fed funds cut. The market sees only a 50% chance the Fed will cut in June while a couple of weeks ago it was 66%.
The Treasury yield curve continued its gradual upward climb which began at the start of 2024. (With oscillations.) The yield curve is approaching flatness as the longer duration yields are climbing toward the fed funds rate.
The bond market still expect the 10-year inflation rate to be 2% - 2.5% as shown by the spread between Treasuries and TIPS. Future fiscal (as opposed to monetary) stimulus could increase the inflation rate since fiscal stimulus would go directly to consumers.
The stock market has recently been at a record high. The Fear & Greed Index is in Greed. The market is risk-on as stocks and junk bond prices rise faster than Treauries. The CAPE is rising and near a record.
NASDAQ 100 bullish percent has been falling since the start of 2024. VIX popped a little last week, showing potential uncertainty. The question is when the bubble will pop.
Gold, silver, copper and oil all rose last week. USD has been oscillating in a channel since early 2023.
The METAR for next week is sunny – unless the CPI inflation report comes in higher than expected. In that case, expect a squall.
Wendy