Wednesday's Market Minute: Things Are Getting Messy

This was a rough year for many investors, but there was always some silver living to the dueling bear markets in bonds and stocks: much of it was, frankly, pretty predictable. And even if you didn’t get on the right side from the get-go, the rules and relationships that were established early on created some useful, clear guidelines for traders.

The big two trading rules of 2022 were 1) trust the dollar, and 2) stocks move inverse to Treasury yields. 

1) The dollar’s been the most reliable indicator of macro trends the past two years as analysts debate the implications of an inverted Treasury yield curve. The greenback’s message is simple: it goes up the tighter policy gets relative to the rest of the world. It bottomed in late spring 2021 when then-Vice Chair Richard Clarida sounded the hawkish alarm, and had fewer ups and downs along the way than the benchmark 10-year yield. Trust the dollar, and you could get ahead of the big bond moves. 

2) Stocks, however, more obviously took cues from the bond market. If rates were trending higher, stocks were going down. Prices moved together, so in the moments stocks rallied, bonds did too. The higher the inflation print or the more hawkish the Fed, the harder the sell-off in bonds and stocks.

Things are getting messier as we close out the year. Yields have been subdued as the Fed steps down their aggression and inflation slows, but stocks are still trending lower. The implication as I’ve written about here is that investors are moving on from the inflation shock and now worried about a growth shock.

Then on Tuesday, we saw early evidence that the dollar may not be as good of a tell either, anymore. If the ECB and Bank of England are hiking just as aggressively as the Fed, the dollar may lose its momentum. For goodness’ sake, if even the BOJ can surprise hawkish, there may be a real regime change coming in which the Fed is no longer hogging the spotlight. That would mean a lower dollar, but it may not necessarily mean lower yields and higher stocks anymore.

Treasury yields bounced Tuesday as the Japanese yen sucked the air out of USD. The 10-year seems to be regaining some momentum off the 3.5% level. This makes sense: bonds can keep selling off even if the Fed slows down, if other central banks are just getting warmed up. Global tightening will assassinate what’s left of the “No Alternative” TINA trade. If the economy slows down, doubly bad. Things are getting messy. Watch your step.  

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