I make it a point during every MTM Monday Morning Meeting to highlight the connection between the financial and energy markets. Central banks set interest rate policies, which have a direct impact on bond prices and currencies. Foreign exchange rates influence stocks, metals and energy, as well as many other commodities. A mixture of all these markets and earnings completes the chain of major market movements.

For the past couple of years prices or inflation figures have had the most impact on direction. Recently, there appeared to have been a shift in fundamental focus. This became obvious following Fed Chair Jerome Powell’s comments at the symposium for economists and Fed officials in Jackson Hole, Wyoming.

Price Pressure

Stock indexes softened in 2022 in response to rising price pressure in most sectors of the economy. The tech sector (Nasdaq) took the biggest hit, followed by the bank-heavy S&P. The small capital index Russell suffered as well. Meanwhile, the Dow Jones Industrial performed the best in a dismal year. Rising inflation was the main culprit. The monthly inflation figures (CPI, PPI and PCE deflator) incited the most volatile days over the past two years. FOMC meetings and Fed Chair Powell press conferences were also significant events that caused big swings and volatile afternoons. Any report that had a price, cost or wage component frequently eclipsed the most reliable technical tools making them less effective. Thus, inflation figures set the tone for FOMC monetary policy.

The Fed has two mandates. One is to promote full employment, which was not an issue over the past year. The other is to use their tools to maintain price stability. They failed miserably on that front. Admittedly, they hesitated too long to counter rising inflation. Thus, they were forced to cool down spending with an aggressive series of interest rate hikes. A little over a year ago the rate hikes halted as higher yields began to stem rising inflation.

Inflation vs. Recession

Early in 2023 there was a shift in focus from inflation data to mounting recession fears. Retail sales and manufacturing data were deteriorating as the stimulus checks that were doled out during the pandemic were spent. Furthermore, some layoffs were becoming more prevalent. The Fed was attempting to navigate a soft landing from the inflationary cycle. They chose to let off the brakes (rate hikes) so as not to push the economy into a deep recession.

We were at a crossroad. For the first time in a while stocks fell sharply on weak sales data and ignored a soft PPI report. The raft of rate hikes appears to have finally impacted spending. Thus, after two years inflation reports may be second in importance to other economic reports, such as employment, GDP, manufacturing, sales, housing and consumer sentiment.

For most of 2024 positive economic data have been bearish for stocks and bonds because strong data would compel the Fed to retain a restrictive monetary policy. Recently, the Fed shifted its focus to employment data from inflation figures. Consequently, strong economic data are now bullish for stocks and bearish for bonds. This is how these markets correlated pre-COVID.

Statistical Cycles

Ranking the importance of economic reports goes through cycles. The best way to gauge impact is to compare the following markets: (ETFs) immediately after a vital statistic is reported…bond (TLT), equity index (DIA, SPY, DIA, IWM), gold (GLD), U.S. dollar (UUP), and you might as well throw in crude oil (USO).

Join me for MTM’s Monday Morning Meetings to find out how the upcoming reports are scoring in order of importance.

John Seguin, Market Taker Mentoring