They’ve Done Studies You Know…

By Heisenberg

Ok, so we got through the first of two Powell testimonies, and it went ok, all things considered. The message was mildly hawkish on balance and the result for yields, the dollar and secondarily, for stocks, was predictable.

The comments that set the tone came early on when Powell suggested that his outlook on the economy had improved of late and although he said he “wouldn’t want to prejudge” anything about the rate path, he noted that for him, the data “add some confidence to the view that inflation is moving up to target.”

“We’ve also seen continued strength around the globe, and we’ve seen fiscal policy become more stimulative,” he added.

 Treasurys dropped on those comments as 10Y yields quickly moved above 2.90.


Zooming in on 2Y yields just as the comments excerpted above hit, you can really see the impact:


And predictably, that’s when it started to go south for stocks – you can see it clearly in futs:


In case you were wondering, real yields (rhs, inverted) were in the driver’s seat:


So it should come as no surprise that by the end of the day, rising yields translated into falling stocks. And not just falling stocks, the worst day for U.S. equities since February 8 when the Dow plunged more than 1,000+ for the second time in four sessions:


You should have known this was possible. After all, the events that unfolded earlier this month clearly suggest that equities are hyper-sensitive to higher yields right now. And if you go back and look at the historical record, there’s evidence to suggest that stocks are going to have a hard time digesting much more in the way of rate rise. Of course there’s also evidence to support the notion that we’re nowhere near the “pain threshold” on real rates or nominal yields beyond which stocks roll over completely.

Bottom line: “They’ve done studies, you know”…

Here’s your ultimate stock-bond return correlation scatter plot via Goldman:


The dollar got a boost from Powell as well, although it really didn’t need it having already jumped on an upbeat consumer confidence print (highest since 2000) and a similarly jubilant Richmond manufacturing read.


On the flip side, EURUSD was lower on the day – in addition to the dollar positive Powell posturing, German inflation data missed.


Between that headline, Powell and some conciliatory (for him anyway) comments from Weidmann, the common currency slipped notably on the day:


European shares were largely flat on the session (because I know you care).

Gold was obviously lower given everything said above:


Oil was down sharply ahead of this week’s inventory data and as the dollar surged. You’re reminded that crude was probably due for a breather anyway:


Higher dollar, surging U.S. yields, lower oil – that should tell you everything you need to know about how things went for emerging markets today. Worst day for the EM ETF since February 8:


Finally, for your moment of zen, here is Sarah Huckabee Sanders to explain who the real Russian plant is… Barack Obama…

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