Stocks finished lower yesterday after the CPI came in much hotter than expected. Bond yields exploded higher, along with real yields. The move in the bond market was jaw-dropping, with the 2-year rate rising by more than 25 bps to 1.62%, while the 10-year was up 11 bps to 2.05%. It resulted in the spread collapsing to just 44 bps on the 10 minus 2s as yield curve inversion comes closer to reality. Even the Fed Fund Futures surged with the December contract rising by an eye-popping 33 bps, to 1.72%. The Corporate Bond ETF (LQD) dropped by more than 1.3%. In the bond market, this was an absolute bloodbath.
Corporates
The LQD closed below critical support at $124 and could very well now be on its way, even lower with no real support again until $120.80.
2-year Treasuries
Believe it or not, the 2-year rate may still be heading even higher after cutting through significant resistance at 1.40% like it didn’t even exist. If the Fed Funds are correct, and Fed Fund Rates for December is over 1.7%, then the 2-year will have to go much, much higher, it could even end up at 2%, by the time things are all said and done.
Financial Conditions
Today also saw the IEF to LQD break out and push above resistance 0.89. It is essential because this ratio tells us that financial conditions are now tightening. The higher the ratio goes, the tighter the conditions are getting.
S&P 500
By comparison, stocks weathered the storm reasonably well, with the S&P 500 dropping by 1.8% and closing just above 4,500. The index managed to erase all of Wednesday’s losses and then some. The S&P 500 is now very close to completing a double top pattern and needs to close below 4450 for that pattern to be all but confirmed. If that happens, the index should revisit the January lows and probably take them out.
Adobe
Adobe (NASDAQ:ADBE) might be one to watch today as it is very close to breaking critical support. This is one of the stocks that led the market lower in January, and after a brief pause, it looks like it is ready to start another leg down.
Shopify
Shopify (NYSE:SHOP) is another stock that needs to be watched closely, as it was also hammered and has taken a brief pause. If it starts moving lower again this time, there is a good chance this falls to $700.
Have a good one.