Meanwhile, Fed fund swaps for December only see one rate cut. The bond market has been looking for only one rate cut basically since the middle of April. Meanwhile, analysts had been pricing in a rate of 4.64% in the middle of April, which is closer to three rate cuts.So, when talking about the equity market not caring about rate cuts, be careful—it isn’t that the equity market doesn’t care. It would seem that the equity market just never came into agreement with the bond market’s viewpoint. Even now, sell-side analysts are still looking for two rate cuts in 2024.
So, be careful when you think the equity market doesn’t care; the equity market does care; it cares because the advance has slowed materially in recent months, and the Nvidia-less Dow and the Russell tell a different tale than the S&P 500 and Nasdaq 100.I would expect that after this week, even less sell-side will be seeing rate cuts because my best guess from listening to the Fed speakers is that the median dots were almost split between two and three rate cuts in March and are likely to be split between 0 and 1 rate cut in June, and that the longer-term run rate is likely to move higher.In the meantime, the jobs report and hot wage data call into question, I think, where monetary policy is. I know that there has been plenty on social media about how bad the data was. However, I struggled to find the bad data. It was healthy NFP growth, and the household survey is always very volatile. The unemployment rate was 3.96% in May, so you only need a few thousand new workers to be added for it to fall back to 3.9%.It is just like all those who opined last year that inflation was vanishing because if you take this out and put that in, the CPI rate is 2%. Unfortunately, that just isn’t how it works; we don’t get to pick and choose the data points we like and omit those we don’t like. We care about the trends, and the trend in employment overall is solid and inconsistent with 2% inflation, with wage growth at 4.1% and productivity at 0.2% in the first quarter.Even if the CPI prints at 0.1% on the headline this month, you will need nearly six months of 0.1% and 0.2% readings to be sure inflation is beat, and I don’t see that happening anytime soon.So, when we look at the 2-year at this point, we see what could be a giant cup-and-handle pattern. If that is correct, the 2-year rate is heading much higher and could surpass the highs it saw in October 2023 at around 5.25%.
Meanwhile, the USD/CAD currency pair broke out to the upside on Friday, just as I have been waiting for. If this break out sticks and we start to see it move back to and test that 1.385 level, it would probably come in conjunction with equity prices moving lower.
Meanwhile, the S&P 500 has reached the 100% extension off the lows witnessed in March 2023, and it appears to have formed an ending diagonal triangle. If the 2-year does break out to the upside and the USD/CAD cross moves higher, then it seems like the odds for a significant pullback in the S&P 500 could happen, finally.
Anyway, that is all for this Sunday.More By This Author:The May CPI Report Could Run Hotter Then Expected Based On Current TrendsStocks Stall Ahead Of Pivotal May Employment Report The Nasdaq Is Entirely Dependent On One Stock
