Introduction
Conflicting Economic News
On Thursday, the Labor Department released a report showing a decrease in initial jobless claims, reaching an eight-month low of 201,000. This figure is close to its lowest level despite the Federal Reserve's efforts to slow down the labor market to control inflation. As a result, the S&P 500 experienced a sharp sell-off of 1.6%.
Another report released on Tuesday by the Conference Board revealed a decline in consumer confidence, hitting a four-month low. Unsurprisingly, this news caused another sharp sell-off in the S&P 500, this time by 1.5%.
Another Force at Play: Bond Yields
Interestingly, these conflicting economic reports suggest that there might be another factor influencing market direction. One such force could be the significant increase in bond yields, which may not be solely driven by economic data.
Deutsche Bank analysts have presented a chart comparing the ratio of copper to gold to U.S. 10-year Treasury yields. This analysis reveals a breakdown in the previously established relationship between these variables.
The analysts attribute the rise in long-term yields to large fiscal deficits, as well as aggressive central bank quantitative tightening and ruling out rate cuts. They express concerns that this situation may not end well unless the Federal Reserve adopts a more dovish stance on rates or pursues a less aggressive quantitative tightening program.
The credit analysts led by Steve Caprio, head of European and U.S. credit strategy, warn that central banks are tightening policy in a way that resembles the late 2000s and 2007.
Support for the S&P 500
Despite these uncertain times, there is some positive news. The S&P 500 has found support at its 200-day average, which stood at 4,195 on Tuesday.
Market Outlook
U.S. stock futures, represented by ES00 NQ00, have shown slight strength as the 10-year yield experienced a 5 basis point decrease. Additionally, crude-oil futures (CL) have been trading higher.
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