Optimism Gradually Gives Way to Caution

The US stock indices closed slightly down on Tuesday, despite a decrease in risk-free rates after the release of US job market data (JOLTS report). The S&P 500 and Dow indices fell by 0.58 and 0.59%, while the technology sector stocks (which are more defensive assets) lost slightly less - 0.37%. At the same time, bond yields (risk-free rates) reacted downwards after the data was released - the two-year rate lost more than 18 basis points in the moment, while the 10-year rate lost about 12 basis points.To understand what a decrease in bond yields along with a negative reaction in the stock market means, two scenarios need to be considered:Bond yields are falling, and stock prices are rising:This scenario is characterized by capital inflows into both bonds and stocks. It is clear that this happens when expectations shift towards monetary policy easing and the expectation of firm income growth or a decrease in uncertainty. For this to happen, moderately negative information (aka "bad news - good news") is necessary, which should trigger a monetary stimulus that is expected to be sufficient to provide expansion.Bond yields are falling, and stock prices are also falling:This same scenario rather characterizes the capital outflow from stocks into bonds (rotation between asset classes), i.e., a flight from risky assets into defensive ones. This also happens when expectations shift towards monetary policy easing, but at the same time, expectations regarding firm income growth worsen or uncertainty increases. This is usually facilitated by the release of excessively weak economic indicators ("bad news - bad news"), and there is concern that the central bank may provide insufficient stimulus when changing policy.Yesterday's JOLTS report, which, as I previously mentioned, is currently in focus for the Federal Reserve due to the increased importance of the labour market in inflation forecasts, surprised with a sharp decline in job openings from 10.5 to 9.9 million, with a forecast of 10.4 million:The sharp reduction in excess job openings indicates that employers are less willing to compete for workers (which should slow down wage growth and then inflation) and that firms' expectations regarding demand for their goods/services may have worsened, causing them to reduce hiring rates.Considering the leading nature of this indicator and the sharp negative change, the market's reaction to the report in stocks and bonds yesterday may well be the first sign of a shift towards caution. For this scenario to gain traction, market participants may prefer to wait for reports on service activity today (with a focus on hiring components) and Non-Farm Payrolls on Friday. If wage growth did indeed slow significantly in March, concerns about an economic downturn could increase, and the market may experience a sell-off that will "demand" interventions from the central bank (hints of an end to the tightening cycle or rate cuts).