Stocks roared higher at the open this morning before paring back their gains through noon. The Dow, S&P, and Nasdaq Composite all advanced slightly as rate hike fears battled rate cut optimism.
Bulls were hopeful that a January slump in durable goods orders, revealed before the market opened, was a sign of an impending recession and inflation slowdown.
Orders for goods like televisions, automobiles, and appliances fell 4.5% month-over-month (MoM) in January, surpassing the -4.0% MoM estimate. It was the weakest headline durable goods sales print since April 2020.
Core durable goods, on the other hand, beat estimates handily. Orders for core durable goods (excluding automobiles) popped 0.7% higher MoM vs. +0.1% MoM expected.
The market initially loved the data before some deeper digging into core durable goods prompted an intraday bearish reversal. Relatively speaking, it was a better report than the headline figure indicated.
“The manufacturing sector will remain under pressure in the months ahead, but the details of January’s report of durable goods orders and shipments suggest factory activity started the year on a better note than the headline figure would suggest,” said EY Parthenon economist Lydia Boussour.
That’s not what the Fed wanted to see heading into its next rate hike, which could result in a 50 basis point increase based on recent comments from Fed officials.
“Because of the renewed focus on hotter inflation and the implications for the Fed, rates are once again driving equities,” said Baird analyst Ross Mayfield while futures were ripping higher.
“The rapid shift in Fed funds expectations and the spike in short-term yields has been risk-off in the stock market, so some reprieve on rates today will likely boost equities.”
Yields dropped at the open before a bond selloff brought them higher again. Stocks and bonds both reversed off their daily highs at roughly the same time. Traders are pricing in a 24.7% chance that the Fed raises rates by 50 basis points at its March meeting. Last week, the market put those odds at 18%.
Hopes for an imminent rate hike pause have faded dramatically as a result.
“Another hot jobs report next week could seriously test the enthusiasm we’ve seen so far this year in equity markets as it would cast major doubt over the extent to which January was a blip and cement expectations for more rate hikes for longer, perhaps even reverting back to 50 basis point moves,” explained Craig Erlam, senior market analyst at OANDA.
A series of 50 basis point hikes would absolutely crush markets. Unless the data suggests otherwise, though, the Fed may have to take that path.
That makes rate-sensitive tech names particularly attractive for bulls (and dangerous for bears) in the coming weeks. The next jobs report comes out March 10th. Rate anxiety could easily push the market lower until then as investors continue to wrestle with confounding economic reports.
