Big Squeeze Breaks Stocks’ Losing Streak As Bond Curve Screams Recession

‘Good’ Services ISM news prompted an immediate ‘bad’ news response in stocks, but that was rapidly shrugged off as the market built on early gains (although we noticed heavy net gamma selling into the ramp for the first hour), despite more hawkish FedSpeak…

The Fed said in its semi-annual report to Congress released Friday, “The committee is strongly committed to returning inflation to its 2% objective.”

Officials expect that “ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive.”

At 11ET, Dallas Fed’s Logan warned that “The US financial system has become increasingly vulnerable to core market dysfunction…” but did not address monetary policy

At 13ET, Boston Fed’s Collins said “more work to do”, adding that additional rate-hikes are needed to cool prices, inflation remains too high. “I anticipate that reducing inflation back to target will require additional federal funds rate increases to bring interest rates to a sufficiently restrictive level, and then holding there for some perhaps extended time.”

Additionally, former Treasury Sec Larry Summers told Bloomberg TV that “The Fed right now should have the door wide open to a 50 basis-point move in March,” adding that “they have not been this far behind the curve for a year or so.”

All of which pushed rate-hike odds for March and May higher (25% and 15% odds of 50bps respectively)…

Source: Bloomberg

During the week, the Terminal rate topped 5.50% and any expectation of a rate-cut in H2 2023 was gone…

Source: Bloomberg

But today saw an extension of yesterday’s exuberant bounce, purportedly on Bostic’s comments (though no one actually believes that), that left the Nasdaq up over 2.5% on the week…

The Dow ended a 4-week losing streak, breaking back above its 100DMA…

The S&P tested its 200DMA then ripped back higher, thru its 50DMA…

The Nasdaq tested its 200DMA and then dip-buyers ran wild…

Consumer Staples and Utes were the only sectors in the red for the week while Materials outerperformed…

Source: Bloomberg

Goldman noted that net flows into global equity funds remained negative in the week ending March 1 (-$7bn vs -$7bn in the previous week), driven by outflows from US equity funds, which have remained negative for four consecutive weeks. Flows into global fixed income funds accelerated (+$8bn vs +$5bn in the previous week) on stronger inflows into government bond funds and IG credit, which had seen more mixed flows in recent weeks… and who can blame them for rotating…

Source: Bloomberg

The ramp of the last two days has been on the back of a classic short-squeeze with ‘most shorted’ stocks spiking over 6%…

Source: Bloomberg

Color us not at all surprised at this squeeze.

On the 0DTE side of the market, both today and yesterday saw negative pressure into the cash opening ramps in equities. It didn’t work yesterday… and this afternoon saw the S&P surge on initial 0DTE call-buying and then later on accelerate higher on unwinds of 0DTE uts…

HIRO Indicator | SpotGamma™

VIX decoupled (to the downside) from stocks this week…

Source: Bloomberg

VVIX and Skews also collapsed this week, despite major event risks in the next few weeks…

Source: Bloomberg

Treasuries were mixed on the week, despite a buying-frenzy today. The short-end underperformed while the long-end actually ended the week lower in yields (2Y +5bps, 30Y -5bps)…

Source: Bloomberg

10Y and 30Y yields closed the week back below 4.00%…

Source: Bloomberg

The yield curve (2s30s) flattened even further this week nearing 100bps of inversion…

Source: Bloomberg

That is its most inverted ever…

Source: Bloomberg

On a side note, inflation expectations (swaps) have surged back up near cycle highs…

Source: Bloomberg

And while homebuilder stocks managed gains this week, we suspect that won’t last long as mortgage rates surged back above 7.00% this week…

Source: Bloomberg

After 4 straight weeks higher, the dollar tumbled almost 1% this week…

Source: Bloomberg

Bitcoin trended sideways all week between $23k and $24k until last night in Asia when it puked back to $22k (potentially after all the headlines around Signature Bank), breaking below the 50DMA ($22870) for the first time since Jan4th…

Source: Bloomberg

Commodities were broadly higher this week with NatGas ripping over 20% to a $3 handle today, extending its big bounce off recent $1 handle lows…

Oil prices plunged early on after WSJ report of a rift between Saudi and UAE – that was denied within an hour and WTI exploded higher, tagging $79…

Gold surged over 2% this week back above $1850…

Finally, for some context as to how massively the market has shifted its perception about The Fed’s rate trajectory, here is the before and after picture of the short-term rate curve since February’s blowout payrolls print…

Source: Bloomberg

The pivot is gone and the terminal rate has soared and yet stocks refuse to face reality…

Source: Bloomberg

Perhaps they will when the ‘hangover’ hits.