Chart(s) of the Day: February 21, 2023
What is driving the drop in equity prices?
In today’s Chart(s) of the day we take a look at the rationale behind today’s bloody, market sell of.
Figure 1 displays a quick summary of today’s price action.
It started off early, futures were down pre-market and early into the session a series of economic releases came in better than expected. See Figure 2.
Solid economic data should be a good thing, right? Well, the market is worried that a re-acceleration of growth will re-ignite another wave of inflation. High inflation = tighter central banks = higher interest rates = restrictive financial conditions = lower present values for risk assets.
The next couple of charts shows the bond market does seem to be pricing in a higher likelihood of this future.
In Figure 3, I have pulled my favorite indicator for monitoring inflation expectations. This is a simple ratio of the performance of Treasury Inflation Protected Securities vs 7-10 Year Treasury Bonds — represented by the TIP and IEF ETFs. If this ratio moves higher, it represents rising inflation expectations, lower the opposite. This ratio has been forming a symmetrical triangle continuation pattern since mid-2022 and since mid-January has been ripping higher, closing today back above the 200 day moving average. Bulls do not want to see this ratio break out to the upside above 1.140.
Figure 4 shows the market’s response to the increasing inflation expectations — one that is in large part responsible for the sell off in risk assets.
Figure 4 is the yield on 10 Year US Government Bonds. It closed today at 3.955%, the highest close since fall 2022. 10 year yields have broken the downtrend that formed since October — exactly when the stock market bottomed — and also closed back above the December pivot high. In other words, the chart looks bullish for yields.
Stock market bulls must hope and pray for inflation expectations to cool off soon. Otherwise, yields will continue to increase and the up move experienced by stocks since October may turn into just another bear market rally.
— Brant
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