A main tool of the federal reserve is controlling short-term interest rates with the Fed Funds rate.
The Fed Funds rate is the interest rate at which depository institutions lend or borrow money from each other overnight.
As the Fed raises the federal funds rate, borrowing money costs increase. As money becomes more expensive to borrow, it can help control inflation and slow economic growth.
Banks and other financial institutions control the bond market's direction by buying and selling bonds of various lengths (I.E., 3-month, 1, 2, 5, 10, 30-year) based on their beliefs about the cost of money in the future and the direction of economic growth of the lack thereof.
As bonds are sold, interest rates go up and vice versa.
At what point interest rates are too high, too low, or just right is often widely debated.
As an investor, we want to use the bond market's direction (beliefs) about the economy since the stock market's future is often tied to interest rates.
You don't have to be an economist but knowing a few basics and charts will go a long way.
As interest rates rise, they can have a negative effect on the stock market and, of course, vice versa.
Sometimes, there will be disconnects between interest rates and the stock market, leading to confusion. When the markets are confused, stay away.
The chart above shows the 2-year bond futures, the S&P 500 futures, and the 10-year bond futures. It was shown in this weekend's Advisory Swing and Options Trader Letter
In the January Jobs report, bond futures prices increased (interest rates lower, not shown), and equities followed higher bonds – typical.
On the February report, a significant negative surprise, bond prices declined sharply, and equities ignored it - very odd.
As bond prices reached price support, equity futures stabilized. Both broke lower on Thursday and reversed on Bostic's comments.
Equity futures stop moving higher at Minor Resistance and have room for the next resistance area above.
If bonds move higher, equities should move higher and vice versa.
The vertical line shown marks Friday, March 10th, the date of the jobs report.
Friday, March 10th, can be a market move event.
Everyone will be listening on Tuesday to see if Powell gives any indication as to Friday's jobs report. This jobs report is going to be a pivotal Friday morning.
The last report was a major surprise that reversed interest rates higher and the equity markets correcting the January gain.
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Happy trading! If you have any questions or comments,
Please e-mail Greg Capra at Greg@mastertrader.com or Dan Gibby at Dan@mastertrader.com
All the best,
Greg Capra
Managing Director of Master Trader
Dan Gibby
Chief Options Strategist