Stocks finished lower on the day, with the S&P 500 dropping by 21 bps and the NASDAQ 100 falling by about 70 bps.
Still, the markets were more settled now that the S&P 500 moved back into positive gamma, causing volatility to subside.
The S&P 500 closed just below the 50-day moving average, which has acted as resistance for the past two days.
More importantly, these opening gaps have been filled more recently, so it would not surprise me to see the gap from the day of the recent CPI report filled in the coming days, with a retracement back to 5,840.
Interestingly, on the NASDAQ 100 yesterday, we saw that the index closed below both the 50-day simple moving average and the 10-day exponential moving average after moving above them yesterday, which appears to be the rejection of the breakout attempt.
The 10-year continued to give back the recent rise in yields, falling back to 4.6%. The 10-year rate is undoubtedly no longer overextended, as noted late last week, and it is at the 20-day moving average. Chris Waller, one of the most hawkish Fed governors, has turned dove since September.
He was once again dovish yesterday and was encouraged by yesterday’s CPI report and still thinks the Fed can get in a couple of rate cuts this year. This helped to push the long end of the curve lower. I’m not sure why there has been a change in Waller’s tone; maybe it was just his time to turn “face” and give up his role as a “heel.” Sorry for the wrestling reference; it seems to work in this case.
I think that the 10-year program will find support in this region. I still think it will ultimately head to 5% and more.
This seems especially true given what could be just the very start of a significant move higher in inflation swaps, based on what appears to be a pennant pattern that has broken out to the upside on the 2-year kind.
BoJ Eyes Rate Hike
Meanwhile, the Bank of Japan is very close to raising rates, and the market is assigning a 90% chance this will happen next week. The Nikkei 225 dollar futures are interestingly positioned at this point, hovering just about 1% above an essential line of support. This chart shows that a break of support of around 37,850 could open the floodgates to much lower levels.
I used the dollar futures to make the overlay with the NASDAQ 100 futures cleaner. To say that the Nikkei and the NASDAQ trade similarly is probably an understatement, and a break in the Nikkei probably would send a bad overall message about the direction of the NASDAQ.