Last week got a bit sketchy in the middle of the week as the 10-year Treasury broke above 4% and stocks dropped below some key support levels. But then on Thursday Federal Reserve Bank of Atlanta President Raphael Bostic gave markets some hope and Friday was a strong day across the board.
I am sticking with a 3.7% target on the 10-year and 4,200 on the S&P 500 Index.
As we head into this week here are six things to watch:
1. It is Jobs Week. We get ADP, Job Openings and Labor Turnover Survey (JOLTS) and non-farm payroll data. Even some Fed speakers seem to be questioning whether the jobs data have been overstated. I'm looking for weaker data, which should help bonds and stocks.
2. Rate hikes. The terminal rate is up to 5.44%. There is chatter that the Fed could raise rates 50 basis points at its next meeting. I am leaning toward 25 basis points, but I am giving 50 basis points a chance. Fed funds futures are pricing in only a small chance of any cuts this year. The year-end rate is 5.3% versus a terminal rate of 5.44%. That seems fair because my view has been that the Fed was serious about staying "higher for longer" all along. From here, a lot seems to have been priced into the bond market (and theoretically the equity market), which should help bonds and stocks this week.
3. Stocks versus bonds. The 10-year Treasury finished unchanged, but stocks finished up 2%-3% (S&P vs. Nasdaq). That is decent outperformance. From a technical standpoint, not only did the S&P 500 recover to the 200-day moving average, but it is also back above the 50-day MA. I suspect that a lot of shorts got added because the market was sliding and exhibiting technical weakness and that probably leaves us with a decent short base, which is susceptible to further squeezes. Stock performance last week should help stocks into this week.
4. Credit is looking strong. Whether you look at individual bonds, ETFs such as the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) , corporate bond indexes or the often maligned credit default swap indexes, credit was strong. High yield also did well. You could argue that this is part of a trend of reallocating money out of stocks and into bonds, but I'm going with the "credit markets often lead the way" story and they are pointing to more potential strength for equities.
5. Stocks are responding well to spending cuts. Announcing spending cuts is relatively easy, but markets seem to like it, so expect more companies that have struggled to "say the right things," which will help markets.
6. Zero days to expiration options. As I wrote last week, I continue to think 0DTE plays an outsize role in daily moves, often pushing markets further than they should go as they help hit various stop-loss triggers. I expect them to start the week being helpful for equities (along with the usual Monday weekly call buying), especially with so much data to come out. But, remember, these instruments can exaggerate moves in either direction.
On the bond side of the equation, I like credit risk and had been adding to closed-end credit (including muni) funds. They should do well if I'm right on bonds and credit spreads.