The opinions expressed below are my own and do not necessarily represent those of Visdom Investment Group, LLC.
Cooling?
Disappointing retails sales data from December sent yields down across the curve and started a bit of a narrative around Fed easing to address economic weakness. This is a minor variant of the maybe-recession-is-around-the-corner concerns that persisted in the prior two years. The probability of a 25-bip cut from the Fed at the next meeting in March is now 23%. This is a meaningful probability. Equities aren’t worried about a maybe-recession and the S&P actually rallied this morning, well after the retail sales data published. The index eventually rolled over in the afternoon, sliding a bit into the close.
While the bond and rates market reacted to the retail sales data, the stock market did not. The stock market exhibited a minor amount of bullishness in the morning and then gave it back in the afternoon. It seems to be a very run-of-the-mill easing back, after a quick rally. I don’t read too much into it. It seems reflexive.
We will learn the January nonfarm payrolls data tomorrow (+68k est ves +50k prior). The 1-week delay in the data has not been a significant issue for markets but with the surprisingly cool retail data this morning, there might be a bit of trepidation concerning the labor numbers. If the labor data comes in cool, expect bonds to rally further, Fed easing expectations to jump, and stocks to actually react. They will not ignore nonfarm if it shows true recession risk.
I wonder what happens if we get strong data though? A stock rally makes sense but I’m not sure how badly the bond market would react, nor at what point that would spill over back to stocks. It’s a low probability though.
Let’s find out tomorrow, see you then.
-Mike
Visdom Market Commentary
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