It’s been a few months since I last commented on the state of the financial markets.  At the time, the market was acting like it was shrugging off the 2022 interest rate hikes and was poised to move higher.

Since then, the stock market has been generally flat.

However, the price action over the last couple days suggests that some significant money is moving into the market.

And, I would point out, there are stocks in economically sensitive sectors, such as gambling and steel that are making new all-time highs, or at least new 52 week highs.  Stocks such as STLD and WYNN come to mind.

One of the big drivers for the stock market rally over the last couple of days was comments by Atlanta Fed chairman Richard Bostic suggesting that the Fed may be in position to pause rate hikes in June or July.

This sparked a pretty significant rally in Treasuries on Friday, resulting in the yield on the 10 Year Note declining by 9 basis points.

It should be noted that we’ve seen this play out before over the last year (dovish comments by a Fed member leading to a rally), but there is no denying that stock market investors are making bets on a soft landing for the economy when all is said and done.

The problem is that the yield curve is more inverted now (as measured by the difference between the 2 year note and 10 year note) than at any time during this tightening cycle.    That spread is about 90 basis points.

This inversion has persisted since last summer, and is virtually always a precursor to a recession.  The timing, however, is never consistent.

In any event, the Treasury market and the stock market are telling two different stories.

This situation is either resolved by a significant plunge in inflation, or a significant recession.

Europe and the Ukraine war

One of the big worries last year was that the Ukraine war would plunge Europe into a recession.

Europeans were experiencing massive increases in utility costs as Putin cut off the supply of natural gas.

However, Europe dodged this massive bullet through a mild winter.  The higher than normal temperatures resulted in much less demand for natural gas, and prices plunged.

A major recession in Europe seems to have been averted, and their stock markets are reflecting that.  The FTSE 100 in the UK and the Euro STOXX indexes are actually trading at all-time highs.

My main concern is that inflation remains sticky.

While commodity prices overall are below last summer’s highs as measured by the Goldman Sachs Commodity Index, they have leveled off.

I’ve also noted that RBOB gas prices are percolating higher.  The April 2023 contract closed at a four week high on Friday.

If we experience another summer of high gas prices, how will the consumer react?

Speculative Chart of the Day

CBAY broke out from a nice base late last year, and embarked on a persistent uptrend.  Volume has remained elevated throughout the uptrend.

The stock has been consolidating for about a month and now appears to be poised to start a new leg higher.  There is some nearby, longer term overhead resistance just over $9.00.