The Ongoing Tug of War, Potential Danger Ahead

The first week of March has been filled with the same “tug of war” action that typified the months of January and February, which I began discussing in my first Whispers of 2023.  The two-day short squeeze rally following non-voting Atlanta Fed President Bostic’s comments last Thursday has reversed quite violently this week on Chair Powell’s two-day testimony in front of Congress, as well as the job data that is not showing clear signs of deterioration.  When I take a step back from this headline noise, my work suggests two things that are quite clear to me — the data is not supportive of dovish Fed hopes, and the equity market is still in a state of denial with the S&P 500 remaining near 4000. 

To quickly show support for my view, let’s look at a few simple charts below.  The bond market’s volatility expectations metric, called the MOVE index, has been noticeably rising since early February, while equity volatility as shown by the VIX has been FALLING.  This positive inflection in bond volatility began in earnest with the reemergence of a potential 50bps Fed hike by Fed speakers Mester and Bullard, which I had flagged on 2/15 as a rising possibility BEFORE it occurred.  During this roughly one-month period, Fed expectations hav...
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