U.S stocks and bonds moved in the opposite direction on Wednesday following the release of mixed data on the state of the U.S economy.

On the one side is the release of the Producer Price Index (PPI), which showed that producer or wholesale prices dropped by 0.50% in October from the previous month. It's the largest drop since April 2020 and well below market expectations.

The release of PPI data came a day after the release of the Consumer Price Index (CPI), which showed that consumer prices remained unchanged in October, with annual inflation dropping to 3.2% from 3.7%, below market expectations, too.

On the other side is the release of the retail sales report, which shows that sales at the nation's retailers grew at an annual rate of 2.5%, more robust than the market expectations of 2.1%.

Meanwhile, the NY Empire State Manufacturing Index rose 14 points to 9.1 in November 2023. It's the highest reading since last April and ahead of market forecasts of -2.8, pointing to a rebound in business activity in the New York State.

Wednesday's economic data were music to the ears of equity traders. Lower inflation makes the case for lower interest rates and higher valuations, while robust sales make the case for higher earnings and higher valuations. Thus, the continuation of the equity rally of the previous day.

The S&P 500 ended the trade session at 4,502.25, up 0.16 % for the day; the Dow Jones at 34,991.10, up 0.47%, and the tech-heavy Nasdaq at 14,103.84, up 0.07%.

The situation differed for bond traders, who focused more on solid retail sales and manufacturing data than the PPI, worrying that interest rates would stay high for much longer. Thus, the end of the bond rally of the previous day and the mild sell-off pushed prices lower and yields higher.

For instance, the benchmark 10-year Treasury bond closed with a yield of 4.53%, up from 4.44% in the previous trade session.

David Russell, global head of Market strategy, liked what he saw in Wednesday's economic reports. "We got more Goldilocks today," he told the International Business Times. "PPI inflation missed while retail sales and Empire manufacturing beat. "Price growth is moderating, but with strong demand on the sidelines. Consumers have plenty of money heading into the holidays and will probably be cheered by the drop in gasoline prices."

Nonetheless, given the solid two-day rally, he doesn't see Wednesday's data having a lasting impact on stocks in the near term, but he thinks these data confirm the positive trend so far this month. "The soft landing is taking shape," he added.

Dr. Daniel R. Gilham, CFP, Farther, thinks that the bond market's behavior is a big head fake. "Bonds have rallied, bond yields have dropped 50 bps in the last 15 trading days," he explained. "This has dropped the discount rate and led to price appreciation in equities."

Christopher M. Naghibi, Executive Vice President and Chief Operating Officer of First Foundation Bank, sees the recent volatility in equity and bond markets as a failure of the Fed's efforts to correct the stock and real estate market values.

"They have been unable to tame the optimism keeping things afloat after 14 years of artificial interest rate deflation," he told IBT. "The bond market too seems to be equally impacted, rising as high as 5.00% in recent weeks, down nearly 75 bps, and today is pivoting back up above 4.50%."

Naghibi believes the Fed's 'higher for longer' rhetoric has not managed to end the inversion of the Treasury yield curve. "It has not meaningfully brought home values down, and it has not stopped the behavioral economics behind major markets," he added. "This despite the seemingly obvious earnings recession on the heels of many companies revising their 2024 guidance down."

Moreover, he expects market volatility to continue for the next year until the Treasury yield curve is no longer inverted. "This will likely also include a recessionary declaration by the National Bureau of Economic Research (NBER)," he concluded.

Inflation