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As we noted yesterday, rather than focusing on Chair Powell’s comments that the idea of hiking rates at consecutive FOMC meetings was not “off the table”, equity traders instead focused on his assertion that the Fed does not target specific sectors of the market. The questioner teed the ball up, but he declined the opportunity to take a whack at stocks. This morning’s economic news caused traders to reconsider the first of those key comments.

The combination of the GDP and Weekly Jobless Claims reports was an eyecatcher this morning. The third revision to first-quarter GDP showed a jump to 2.0% from the prior 1.3% report and well above the 1.4% consensus estimate. We saw modest declines in the GDP Price Index and Core PCE, with both coming in 0.1% below both the prior reads and estimates, but they remain at above-the Fed’s target 4.1% and 4.9%, respectively. Meanwhile, Initial Jobless Claims fell to 239,000, well below the expectation and last month’s revised 265,000. Taken as a whole, they certainly provide no disincentive for a second-rate hike.

We have one tangential hypothesis about the better-than-expected weekly jobless numbers to consider: were they artificially depressed by the recent Juneteenth holiday? Government employment offices were closed, meaning there was one fewer day when claims could be filed. Economic projections usually take holidays into account, but it is possible that the relative newness of Juneteenth has not been fully incorporated into relevant models. I ran this theory past our senior economist, Jose Torres, and he agrees this could be a factor in today’s surprise.

It was only Tuesday when we noted that Fed Funds futures were finally pricing in a roughly 10% chance for a second 25-basis point hike by November. That probability is now 40%. We also see 2-Year yields up 16bp to 4.87% and 10-Year yields up 14bp to 3.84%.For those of you keeping score at home, that pushes the 2-10 Inversion to a near-record 1.03%.Bond traders, admittedly a more pessimistic bunch, are implicitly telling us that the odds of a recession are even higher than it was before – even if its arrival may not be as quick as most people thought.

The inherent optimists in the equity arena instead chose to accentuate the positives. After trading at roughly unchanged levels for the first hour or so, we have seen a modest rally as we approach noon. Unlike in many prior sessions, mega-cap tech stocks are relative laggards. The large-cap leadership is coming from banks after we learned late yesterday that the largest among them all passed their stress tests. I know of no one who credibly thought that any would fail, but rather than selling the news, traders are choosing to focus on the likelihood that their dividend and buyback plans will receive swift approval.

The real star today is once again the Russell 2000 (RTY). That index has been having a bit of a resurgence, and since smaller stocks should benefit from a robust economy, it is not surprising to see them catching a bid. For that matter, it is also unsurprising to see various cyclical stocks doing better as well.

We find ourselves back in a familiar spot. Bonds are screaming recession while stocks – which are supposed to be forward-looking – admire the current conditions. Meanwhile, VIX maintains its 13 handle even as its 30-day lookahead now incorporates the bulk of second-quarter earnings season. Stocks have shaken this situation off before. Let’s see if that continues with end-of-quarter window dressing battling it out with the PCE Deflator report.

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