Friday's Market Minute: Yields Gain More Ground as Equities Stall Out

Last week, the Fed changed its communication strategy during the FOMC meeting. Markets used Powell’s acknowledgment of disinflationary trends as an excuse to continue to rally. The current bear market impulse really has been based on hopes for a soft-landing narrative. However, the rally has been led by beaten-down stocks in cyclical sectors such as discretionary and communication services, which possibly reflects retail speculation and short-covering. Given the surprisingly strong labor report for January, it remains to be seen whether the Fed increases the hawkish tone, or continues to lure speculators into chasing the current rally. 

This week, equities once again initially rose after Federal Reserve Chair Jay Powell spoke for the first time since January’s impressive employment report which printed data that demonstrates resilience in the labor market with unemployment at a 53-year low. However, equities have stalled out a bit as yields continue to rise, volatility has inched higher, and the dollar has remined firm.

The Fed clearly wants to tighten financial conditions to root out inflation, and equity markets grasp at any reason to rally, considering the bear market is now in its 5th consecutive fiscal quarter. Policy makers’ mixed messages of highlighting disinflationary trends, but also maintaining a commitment remain firm on rates has created another level of uncertainty for risk-taking investors. Using the bond market as an objective measure of inflationary trends and tighter financial conditions to come, the two-year treasury yield has risen 40 basis points since the labor market report last Friday. Despite the rhetoric around disinflationary trends and the hopeful notion of a sustainable relief rally based upon a Fed pivot, the bond market has not demonstrated conviction in a pause or pivot just yet.

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