US stocks now join the treasury selloff, and the US dollar pushes higher on the back of the increasingly hawkish Federal Reserve (Fed) bets.
The US 2-year yield was again above the 3.70% mark, whereas the 10-year yield flirted with the 4% for the first time since last November.
The preliminary services PMI in the US came in better than expected for February, and the services PMI ticked above the 50 mark, into the contraction zone, for the first time since last July.
The strong economic data further fueled the Fed hawks. But this time, the stocks sold off as well, despite the strong economic data. The weak outlook from Walmart and Home Depot left the no-landing bets under the dark shadow of higher US yields.
The S&P500 dived 2% on Tuesday, below the minor 23.6% Fibonacci retracement on the latest October to February rally, and below the 4000 psychological mark.
Nasdaq 100 slipped 2.41% and closed the day a few points above the major 38.2% retracement. Falling below this level will send the index into the bearish consolidation zone.
Today, the FOMC minutes will be closely watched. We know that the Fed officials will sound concerned with the strong jobs market and will point at the resilience of the economy to continue hiking the rates.
So, the chances are that the minutes will be hawkish, and could further weigh on sentiment. But there is always a chance that the market sees the glass half full than half empty.
But the negative correlation between stocks and bonds, after stocks rallied and bonds fell – the exact opposite of what we have predicted at the start of the year – may be coming to an end, as in the absence of recession talk, the Fed expectations will continue driving markets, and the increasingly hawkish Fed expectations are bad for both stock and bond valuations.
Fed hawks are supportive of the US dollar, however. The dollar index is now testing two important technical resistances to the upside: the minor 23.6% retracement on the end of September to the beginning of February retreat – which gave that much-needed space to breath to other currencies, and the 2021-2022 bullish trend.
It’s still early to talk about a medium term bearish reversal.
The EURUSD, for example, has been under pressure since the beginning of February, but the major 38.2% Fibonacci retracement, which would call the end of the positive trend is still a way to go. It stands a touch below the 1.05 mark. But of course, we know that the Fed can go much further than expectations. Speaking of rate hikes, the Reserve Bank of New Zealand (RBNZ) hiked its interest rates by 50bp today, after a three-month break. The bank warned that Cyclone Gabrielle could lead to higher inflation and output disruptions in the near term and that rebuilding work will boost activity in coming years, which is also bad for inflation.
The RBNZ decision gave a boost to the kiwi today. Whether the pair could hold ground above the 200-DMA, and above the major 38.2% retracement on the latest rally will depend on the… US dollar appetite, of course.
