What was the biggest takeaway from last week’s post-US CPI price action?

Maybe that’s an odd question to ask. Who remembers last week? A lot’s happened since then. Donald Trump became President of the United States again, for example.

No, but seriously, if you got anything from the simultaneous rally in stocks and bonds, both of which were nursing losses until the BLS said wholesale and consumer price growth cooled in December, it’s that “rate sensitivity works both ways,” as Morgan Stanley’s Mike Wilson put it Tuesday.

As the chart reminds you, stocks and bonds have traded in tandem for months, and while that’s obviously a bad thing when rates are rising, particularly when they’re rising for the “wrong” reason(s), it produces super-sized gains for balanced portfolios in the presence of a bullish rates catalyst like last week’s BLS releases.

In these environments — i.e., when yields rise far enough and fast enough to flip the correlation with equities — a snapback bond rally has a tendency to trigger outsized stock gains, reinforcing the negative yield-stock correlation.

The figure below, from Wilson, makes the point.

“The inverse correlation between equity returns and yields strengthened again following last week’s light CPI report, as stocks rallied materially on the back of lower rates,” he wrote.

Needless to say, that only reaffirms Wilson’s contention that the most important factor for stocks in the near-term is rates, particularly at the long-end, where the term premium’s 95bps (!) higher versus the (negative-territory) lows seen just ahead of the September FOMC meeting.

“[Equity] index direction (beta) will be primarily determined by the level and direction of back-end rates and the term premium,” Wilson said. “Furthermore, until the 10-year US yield falls back below 4.50% and/or the term premium settles down on a sustainable basis, this negative correlation between stocks and yields is likely to persist.”

Now, if you haven’t read “Trump’s Term Premium Problem,” go read it.