Parsing the Peace Process

This morning got off to a hopeful start for those who would like to see a reopening of the Strait of Hormuz – and by that, I mean pretty much every global investor.  Oil futures fell after Iran’s state television reported on a draft interim peace deal that would allow maritime traffic to resume.  Unfortunately, a few hours later the White House dismissed that report as “a complete fabrication.”  Oh well.  Oil futures recovered some, but not all their losses, and stocks took a minor breather for the first time in a while.

Interestingly, stock indices skipped their customary rally when the first piece of news hit the wires.  Indeed, pre-market futures were higher, but that is hardly newsworthy at this point.  ES and NQ futures were up about 0.3% and 0.8%, respectively, at their best.  Yet the nascent rally stalled out even before the White House denial.  Although this might have been the first sign of “sell the news” after weeks of relentlessly ratcheting higher on each hopeful note of progress, that seems overstated.  More likely, what we see today is simply a pause in the powerful chip-led advance with a bit of sectoral rotation thrown in for good measure.

Looking at the breakdown of S&P 500 (SPX) sectors around noon, we see 7 of the 11 trading higher with the index about 0.1% lower.  That’s hardly a selloff.  Consumer stocks, both discretionary and staples, are the leaders, with energy, financials, and information technology leading the downside.  The Philadelphia Semiconductor Index (SOX) is taking a day off with a 2% decline, even with many popular memory chip manufacturers like Micron Technology (MU), Seagate (STX), and Western Digital (WDC) continuing their customary advances.  Momentum-driven inflows continue into that sector, which has also powered their Korean-listed counterparts to truly stellar advances.  It takes quite a bit to get now-trillion-dollar stocks to consistently rise by double-digit percentages, but their inclusion in newly popular investment vehicles is powering that advance. 

Bonds have also taken a bit of a breather.  As we noted yesterday, yields fell across the curve, so while it is not concerning that bonds seem to be consolidating their recent gains (remember, bond prices and yields move inversely), it might be notable that they failed to rally substantially when today’s hopes seemed brightest.  Then again, the recent substantial flattening of the yield curve likely factored in the relative stasis.  Much of that change occurred late last week, thanks to a change in tone from an influential Fed Governor.  As we wrote on Friday:

The flattening is likely linked to comments from Fed Governor Christopher Waller, who advocated that the Fed should drop the “easing bias” from its policy statement.  While he hasn’t yet advocated for a hike, he noted that “inflation is not headed in the right direction.”   This would have him joining the three FOMC members who dissented at the last meeting because they too wanted to remove the easing bias from the statement.  

Waller’s comments are notable for two reasons.  First, it adds to the chorus of FOMC members who are opposed to immediate rate hikes.  A greater focus on fighting inflation would raise the likelihood of future hikes, pushing up short-term rates while potentially lowering long-term rates by lowering inflationary expectations.  Second, bear in mind that Waller had been among the more dovish members of the FOMC, advocating for lower rates during the period when the President was actively considering candidates for Jerome Powell’s successor.  

The following chart shows the scope of the recent flattening:

Spread between 2-Year and 10-Year Treasury Yields, 1-Year Daily Data (white), with 30-Day Moving Average (green)

Source: Bloomberg

Thus, another day of hope and another day of dashed hopes.  Unlike the numerous other times we have seen this pattern, stocks seemed to have yawned.  Perhaps they need more of a rationale (or excuse) to rally today.  For today at least, the ratchet was relatively stagnant.