April 2026
April marked a change in market psychology as consensus thinking shifted from a slowing economy and the need for additional rate cuts to an economy seeming to reaccelerate and the possibility that the Fed’s next move will be a rate hike. What’s confounded market watchers is the price action of both the bond and stock markets.
The S&P 500 started April just off the low of the year, then reversed course to rally into month end, finishing the month with a 10.4% gain. The rally has continued into May with the S&P seemingly touching a new high every day. The main catalyst has been the promise of artificial intelligence and the demand it’s expected to generate.
The bond market, on the other hand, is fixated on the rising cost of oil and the impact its having on inflation. The just-released Consumer and Producer Price indices were both elevated, which has pushed bond yields higher and flattened the yield curve. The two-year note currently is yielding 4.0% while the 30-year bond stands at 5.04%, and the yield curve is roughly 5 basis point flatter than where it stood on April 1st. The December Fed Funds future is showing a slight chance that the overnight rate will be higher by the end of this year. That same contract was implying 65 basis points of rate cuts at the start of the year.
The BLS reported that the economy added 115,000 new jobs in April, nearly twice the 65,000 expected. As for the March report, that was, in fact, revised higher to 186,000. Despite the litany of job cut announcements, the employment picture appears to be expanding.
As we started the year, the Fed had communicated that their balance of risks had shifted to worry over employment and maintained a bias toward further rate cuts. With the last two employment reports nullifying that risk simultaneously with the sharp rise in energy prices, the risk scales have likely shifted back into balance. Translated, any further rate cuts are likely off the table for the time being despite what the incoming Fed Chairman may have promised the President.
Amid the rise in inflation, and the reacceleration of the jobs market, the Chairmanship of the Federal Reserve passes from Jerome Powell to Kevin Warsh this month. Powell’s tenure ends amid rising inflation and a reacceleration of jobs growth. While he can safely blame the rising inflation on the war with Iran, he nevertheless will be remembered for the dubious distinction of calling the highest inflation in decades transient.
Kevin Warsh succeeds Powel with the expectation that he’ll immediately engineer a rate cut as he promised President Trump. To be fair, when Trump first put forth Warsh as the nominee, conventional wisdom was that the economy was weakening and that monetary policy was too tight. Given the current backdrop, Warsh could easily support keeping the overnight rate unchanged despite the prospect of succumbing to the wrath of Trump.
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