Indices fell, Gold and Bonds rally, VIX fear index up

Stocks fell and bonds rallied this morning on increased recession fears following this morning's weak US labor market data, with the poorest job openings data since April 2021. The VIX,  Wall Street's fear index, surged higher to trade near 20, and Gold hit a 3-year high. While the Fed is widely expected to hike rates tomorrow, Fed fund futures are now pricing in expectations of three possible rate cuts by the Federal Reserve's December meeting, even though it has clearly stated in the past that it won't start cutting rates until next year at the earliest. An outside risk, tangible if hard to price, is continuing geopolitical tensions involving global superpowers.

We invite readers to take a look at our recent research on equity market valuations, ‘Are equity markets too relaxed?’

When will the Fed start to cut rates?

Equity markets trade on future expectations, and both the Nasdaq and the S&P 500 stock indices are trading just below their February highs, despite 95% odds this morning that the Fed will hike its benchmark interest rate another 25 basis points tomorrow. Traders are looking ahead to the anticipated pause to follow the rate hike, and the anticipated rate cuts to come after that by the end of the year.

Of course, these dynamics could change if the Fed comes out with more hawkish language than traders anticipate tomorrow, while they could also change if the language was more dovish than expected. The risk though is on the side of the Fed being more hawkish, as Fed members continue to emphasize that they do not want to repeat the mistake it made in 1980 when it pivoted too soon.

Does the First Republic rescue signal the end of Bank failures?

First Republic Bank fell into the hands of the Federal Deposit Insurance Corporation over the weekend, before being purchased in an auction by JPMorgan. The story here was the initial absence of market impact: this was the third regional bank of about 30 of similar size failed over the weekend, and no panic ensued on Wall Street. JPMorgan CEO Jamie Dimon said that this puts the bulk of this banking crisis behind us. Wall Street’s reaction suggests that we’ve moved away from the “fearing the worst” mentality to currently anticipating the best, or at least something close to that. Nonetheless, regional banks were weak again today as fear sets in again following the weekend failure of First Republic.

Indices slump, bonds rally, VIX rises

• At the time of writing, the broad S&P 500, NASDAQ and Russell 2000 indices were off by 1.4%, 1.6% and 2.7% respectively, with the latter pointing to weakness in smaller stocks
• The VIX, Wall Street’s fear index, rose to 19.0 (a move of almost 20%, major repricing of risk)
• The dollar index stuck at 102, with major cross rates unchanged
• Yields on 2- and 10-year Treasuries fell sharply to 3.97% and 3.45%, respectively (bonds love recession fears)

Gold rallies, oil sells off

• Gold prices rallied to $2,021 per ounce mark, up by 1.4%, and a 3-year high
• Crude oil prices fell 4.4% to $72.3 per barrel
• Soybean prices were stronger, posting modest gains across the board following last week's collapse
• Wheat prices are trading seasonally weaker, with traders no longer worried about the drought in the Plain
• The grain and oilseed markets are mixed, continuing with Monday’s trends of higher soybean and weaker corn and wheat prices.
• Corn and soybean prices are expected to rise in the 2023-24 marketing year on tightening supply, due to the war in Ukraine, the US Plains drought, ongoing dryness in Argentina and a shift to an El Nino weather pattern for Australia

Weaking labor market data

• The Job Openings and Labor Turnover Survey (JOLTS) revealed that 9.59 million job openings were posted at the end of March, matching analyst estimates, down from an upwardly revised 9.97 million the previous month
• This is still a very high number, but it is trending lower, reflecting a softening jobs market, which is what the Fed is trying to do, but Wall Street fears
• Other data showed that factory orders grew 0.9% month-on-month in March, less than the 1.3% growth expected, after falling 1.1% the previous month

Geopolitical risks continue to increase

• Increased presence of conflicting forces ups the risk that an accidental conflict could turn into war, adding the Gulf and South China Seas to the Ukrainian conflict
• This weekend saw the seizure of a US bound oil tanker by Iranian forces, closely following the US seizure of Iranian oil tanker destined for China
• Encounters between US and Chinese aircraft and warships continue to rise in the Taiwan Strait and across portions of the disputed South China Sea, largely seen as international waters
• Rising tensions are so great that Japan is doubling its military defense budget, and South Korea is strengthening its defense forces

Analysis by Arlan Suderman, Chief Commodities Economist

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