Markets in No-Man’s-Land

The US stock market is listless today, meandering without direction on little news. The dollar is a bit stronger, putting pressure on commodities. WTI crude oil is down about 2.5% to trade at $74.50/barrel. Copper is down 1.5%, reversing some of its year-to-date rally. Gold is little changed today (and this year). The bond market, however, is rallying across the board this morning after having been beat down for three weeks straight. Stocks, bonds and commodities are well off their bear market bottoms, but traders are still struggling to price-in expectations for how high the Federal Reserve will take interest rates over the next few months. That’s proven to be a moving target.

Yesterday, stocks pulled back on stronger than expected economic data. S&P’s business activity surveys covering both manufacturing and service sectors rebounded strongly this month. The reports shows that input costs eased, but that companies are still raising prices. In addition, hiring activity improved to a five-month high. An economist with S&P explained that “despite headwinds from higher interest rates and the cost-of-living squeeze, the business mood has brightened amid signs that inflation has peaked and recession risks have fade.”

This, of course, sounds very positive. But Fed officials may interpret it more darkly as evidence that further rate hikes are needed to control inflation. Later today the Fed will publish minutes from its last policy meeting, and of course traders will parse each word looking for hints of the future direction of monetary policy. In the meantime, we’re getting a trickle of media interviews suggesting Fed officials see the need for higher rates over a longer period of time. Earlier today, St. Louis Federal Reserve Bank President Bullard said the economy has proven more resilient than expected, and a few more interest rate increases are needed to get to the Fed’s desired “terminal rate.”