Is the Yield Curve Signaling an Imminent Recession?

What’s in Today’s Report:

  • Is the Yield Curve Clearly Signaling an Imminent Recession?
  • Chart: Oil Testing Critical Support

Stock futures are sharply lower with global shares as much of yesterday’s rally is being given back amid a resurgence in growth concerns ahead of Powell’s testimony today.

U.K. CPI met estimates at 9.1% but Input PPI jumped 22.1% vs. (E) 19.4% stoking fears that central banks will have to be even more aggressive to get inflation under control in the months ahead.

There are no notable economic reports today but there are multiple Fed speakers: Barkin (9:00 a.m. & 12:00 p.m. ET), Powell (9:30 a.m. ET), Evans (12:55 p.m. ET), and Harker (1:30 p.m. ET).

Then in the afternoon, there is a 20-Yr Treasury Bond auction at 1:00 p.m. ET that could move yields and impact equity markets.

Bottom line, the focus will be on Powell’s testimony before the House this morning as there has been a resurgence in concerns about global growth in the face of the latest broad shift to more aggressive central bank policy in response to sticky and elevated inflation pressures globally. And if Powell is seen as getting more hawkish, or the market shows signs of losing confidence in the Fed’s policy plans, we could potentially see stocks test the 2022 lows.

What the Fed Decision Means for Markets

What’s in Today’s Report:

  • What the Fed Decision Means for Markets: Not as Hawkish as Feared (But That’s Not as Positive as It Used to Be)
  • FOMC Decision Takeaways
  • Retail Sales and Empire State Manufacturing Index Takeaways – A Further Loss of Momentum

Stock futures are down more than 2% this morning, tracking global shares lower as investors digest the latest central bank decisions, a rebound in rates and recession fears.

The Swiss National Bank surprised markets with a 50 bp hike overnight which is compounding fears about aggressive central bank policy in the face of slowing growth ahead of this morning’s BOE announcement.

Today, focus will be on the Bank of England announcement early and if we see another hawkish decision, stocks could extend this morning’s decline on a combination of rising rate fears and growing concerns about future economic growth.

From there, focus will turn to economic data in the U.S. with Jobless Claims (E: 220K), Housing Starts and Permits (E: 1.695M), and the Philadelphia Fed Manufacturing Index (E: 5.5) all due to be released this morning. With the Fed set on tackling inflation in the months ahead, the market will want to see strong data to show the economy can weather sharply tightening financial conditions.

Then in the late morning, the Treasury will hold an auction for 4-Week and 8-Week Bills at 11:30 a.m. ET. Bottom line, if we see rates rise materially today, especially on the shorter end of the yield curve, then stocks are likely to extend this morning’s declines on aggressive policy concerns.

Fed Meeting Preview

What’s in Today’s Report:

  • FOMC Preview
  • Q&A: Technical Resistance and Downside Targets for the S&P
  • ISM Manufacturing Index Takeaways

Stock futures are little changed as yesterday’s late-session rally is being digested following more hot inflation data and a slightly hawkish RBA hike (25 bp vs. E: 15 bp) overnight.

Economic data on growth was better than feared overnight but Eurozone PPI was hotter than expected with a staggering annual rise of 36.8% vs. (E) 36.2% in March.

Looking into today’s session, there are a few economic reports to watch including March JOLTS (E: 11.27M) and Factory Orders (E: 1.1%), however, with the May FOMC Meeting beginning this morning, a sense of Fed paralysis is likely to begin to grip markets ahead of tomorrow’s announcement.

Finally, earnings season does continue with a few notables reporting today: PFE ($1.66), BP ($1.41), HLT ($0.59), AMD ($0.90), and SBUX ($0.60) which could have an impact on sector trading but is not likely to move the broader markets given the focus-shift to the Fed.

Tom Essaye Quoted in Market Watch on March 18, 2022

Two-year Treasury yield has biggest two-week gain since 2008 as investors assess Fed’s rate-hike efforts

The market has, to a degree, called the Fed’s bluff on rate hike plans as rate hike expectations were dialed back in the immediate wake of the dot plot release and economic projections, but the Fed is indeed tightening policy and regardless of the pace of the trend, yields are going higher in the months and quarters ahead, said Tom Essaye, founder of Sevens Report Research. Click here to read the full article.

Powell Speech Takeaways

What’s in Today’s Report:

  • Powell’s Comments Takeaway: It’s Not About 50 Basis Points, It’s About Certainty
  • Chart: 2-Year Yield surges beyond 2%

Stock futures are cautiously higher this morning after a mostly quiet night of news as traders continue to digest Powell’s more hawkish tone from yesterday and monitor a lack of progress towards a ceasefire in Ukraine.

Bond yields are continuing to rise today with the 2-year up another 4 basis points which is pressuring the yield curve. The 10s-2s is down to just 16 basis points this morning.

There was no market-moving economic data overnight and no notable reports are due out today. There is one Fed speaker: Williams (10:30 a.m. ET) and the Treasury will hold a 52-Week Bill auction at 1:00 p.m. ET.

Bottom line, equities have shown resilience in the face of the surge in yields since last week’s Fed meeting, however, if we see yields accelerate higher again today like we did yesterday, it will be increasingly difficult for stocks to extend their recent rally. Any concrete, positive news out of Ukraine could help stocks overcome higher yields in the near term and move higher though.

Tom Essaye Quoted in Kiplinger on February 9th, 2022

Stock Market Today: Nasdaq Recovery Continues as Comms, Tech Rebound

Bottom line, inflation remains the single biggest potential influence over Fed policy, and Fed policy will determine whether stocks continue to rally, or decline…said Tom Essaye, founder of the Sevens Report. Click here to read the full article.

What the Fed Decision Means for Markets

What’s in Today’s Report:

  • What The Fed Decision Means for Markets (50 bps in March and/or five hikes in ’22)
  • EIA Analysis and Oil Market Update

Futures are little changed and recouped modest losses earlier this morning, as global markets digest yesterday’s Fed decision and mixed earnings.

Economic data was sparse as German Gfk Consumer Climate and UK Distributive Trades both slightly beat estimates.

Today will be a busy day of data and earnings and generally speaking markets need solid data and good earnings/guidance to help this market continue to stabilize.  Some reports we’re watching include: Jobless Claims (E: 265K), Durable Goods (E: -0.5%), Initial Q4 ‘21 GDP (5.7%) and Pending Home Sales (E :0.6%).

On the earnings front, the key report today is AAPL ($1.89) after the close, but other reports we’re watching include: MA ($2.19), MCD ($2.31), JBLU (-$0.40), LUV ($0.05), VLO ($1.69), SHW ($1.35), V ($1.69).

Pace Matters

What’s in Today’s Report:

  • The Fed Rate Hike Rhetoric Needs to Calm Down

Futures are slightly higher as markets bounce following Thursday’s declines after a generally quiet night of news.

Economic data was better than expected overnight as UK Industrial Production (1.0% vs. (E) 0.3%) and monthly GDP (0.9% vs. (E) 0.3%) both beat estimates.

Today focus will be on earnings, some economic data and more Fed speak.  Economically, the key releases today are Retail Sales (E: 0.0%), Industrial Production (E: 0.3%) and Consumer Sentiment (E: 70.4). From the Fed, we have Harker (10:00 a.m. ET) and Williams (11:00 a.m. ET).  The bottom line is that to help markets stabilize, the data and Fed speak need to give the “March rate hike” mantra a rest, so that means in-line economic data and a slightly more relaxed tone from Fed officials.

Finally, today marks the start of earnings season and there are multiple key reports to watch today:  JPM ($ 2.98), WFC ($1.09), BLK ($10.23) and C ($1.89).  Put simply, earnings need to be solid given the recent volatility, otherwise we can expect the declines to accelerate over the coming weeks.

What Could Go Wrong in 2022

What’s in Today’s Report:

  • What Could Go Wrong in 2022
  • Chart: Rate Hike Prospects Weigh on Nasdaq

Futures are modestly higher despite negative COVID headlines and a mixed outlook for China’s economy.

New COVID cases topped 1 million and set a record for a second day Tuesday as the highly contagious, but less severe Omicron variant continues to rip through hot spots around the globe. But for now, few nations have implemented new lockdowns allowing investors to look past the latest surge in cases.

According to Bloomberg Economics, China’s economy grew this month but property sector risks remain a key concern and that weighed on Asian shares overnight.

Today, there are two economic reports due out: International Trade in Goods (E: -$86.0B), and Pending Home Sales (E: 0.6%) but once again, neither should move markets as they should not shift the outlook for monetary policy.

There are no Fed speakers today but there is a 7-Year Treasury Note auction at 1:00 p.m. ET. If the auction is weak and yields rise materially, that could add pressure to higher valuation sectors of the market like tech/Nasdaq and drag the broader equity markets lower in thin holiday trading today. Otherwise, the Santa Claus rally remains in effect and the path of least resistance does still remain higher given the recent records in the S&P 500.


Sevens Report Q4 ’21 Quarterly Letter Coming January 3rd

The Q4 2021 Quarterly Letter will be delivered to advisor subscribers on Monday, January 3rd.

With several key macro issues coming to a head in the next few weeks, we believe the first quarter could be the most volatile of 2022.

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You can view our Q3’21 Quarterly Letter here.

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All Clear for a Santa Rally?

What’s in Today’s Report:

  • All Clear for a Santa Rally?
  • Weekly Market Preview:  All About the Fed
  • Weekly Economic Cheat Sheet:  First Look at December Data (Is Omicron An Economic Headwind?)

Futures are modestly higher on continued momentum from last week’s rally, following a very quiet weekend of news.

On COVID, the growing consensus is that fully vaccinated people are protected against severe illness while those with boosters are also protected against infection, so it is increasingly unlikely Omicron causes a sustained pullback.

On stimulus, Democrats are still trying to pass the $1.7-ish trillion spending bill before year-end, but Senator Manchin remains an obstacle, and passage of the bill in 2021 (or perhaps at all given high inflation and 2022 is an election year) is becoming increasingly unlikely.

Today there are no economic reports and no Fed speakers so it should be a mostly quiet day, although we could get official vaccine results vs. Omicron from PFE or MRNA any day, and if the data confirms the consensus opinion, that would be a mild tailwind on stocks.