Stocks smell a Fed pivot, bonds not so much
- Matt Phillips, author of Axios Markets
Investors seem to think the Fed is close to pivoting away from relentless rate hikes.
Driving the news: The S&P 500 just notched its best two-day run — up 5.7% — since the early days of the COVID crisis when the Fed rushed in to, basically, keep the economy from collapsing.
- Tuesday's 3.1% gain for the benchmark index was the best of the year. (Twitter's 22% gain helped — but stocks were up across the board.)
The big picture: The atrocious performance this year of both stocks and bonds has been driven almost entirely by the Fed's effort to raise rates to tamp down inflation.
- In recent weeks, as inflation reports have continued to arrive too high, Fed chair Jerome Powell has doubled down on the central bank's commitment to keep hiking — even acknowledging that it will likely generate economic pain.
Between the lines: Stock market investors seem to think that potential pain — and afterward, a pivot away from rate hikes — could come sooner than they thought even a few days ago.
The reasons: New data shows the U.S. jobs engine may be starting to sputter. Openings in August collapsed by more than 1 million.
- Manufacturing is also slowing fast.
- Other central banks may be easing up on rate hikes — Australia just hiked by less than expected.
- And financial strains — like the U.K.'s rate shock that hammered pensions, or persistent market doubts about the health of Credit Suisse — are emerging.
Yes, but: The bond market doesn't share the stock market's conviction that we're near the end of the rate-hiking cycle. If it did, we'd see yields on Treasury bonds falling more sharply.
What we're watching: For confirmation that this is just another bear market rally, the type of periodic upswing — like the one we saw over the summer — that can take hold from time to time despite the broader downward trajectory that defines a bear market.
- If we don't get confirmation from Fed officials that they think they're getting inflation under control, expect this rally to peter out, too.