10-Year Treasury yields broke through support at 1.70%. Prior to 2012, the 1945 low of 1.70% was the lowest level in the 200 year history of the US Treasury. Expect a test of primary support at 1.40%.
Falling Treasury yields generally indicate a flight from stocks to the safety of bonds. The S&P 500, however, is consolidating below resistance at 1600. Breakout would suggest an advance to 1650, while reversal below 1540 would indicate a correction to the rising trendline at 1475. Recent weakness on 13-week Twiggs Money Flow favors a correction, but oscillation above zero indicates a healthy primary up-trend. A June quarter-end below 1500 would present a strong long-term bear signal.
* Target calculation: 1475 + ( 1475 – 1350 ) = 1600
The Nasdaq 100 index is testing resistance at 2900. Breakout would offer a target of 3400*, but bearish divergence on 13-week Twiggs Money Flow favors a break of 2800 and test of the rising trendline at 2700.
* Target calculation: 2900 + ( 2900 – 2500 ) = 3400
Gold rallied to test resistance at $1500/ounce. Breakout would suggest a bear trap and a rally to $1600, but respect of resistance is likely and would signal another test of support at $1330/1350. A gold bear market indicates falling inflation expectations, but that could also translate into lower growth in earnings and higher Price Earnings ratios.
Structural flaws in the US economy have not been addressed and uncertainty remains high, despite low values reflected on the VIX.
A fascinating chart. I wonder when interest rates go up how the US is going to fund its debt obligations? Print more money? I think the game will be over when the interest rates start to go up beyond the feds control and at the same time the $US starts falling indicating less demand for the $US. This less demand of the $US would probably indicate to me that foreign investment (which funds their structural fiscal deficit the same as in Australia) would be slowing. I also noticed if I draw a trend line on the S&P 500 from the top in 2000 through the top in 2007 it got up to this point a few Thursdays ago. I will be interested to see if this resistance trend line can be broken.
As for the lower bond yields. I don’t really think its money rotating out of stocks into bonds for the most part as traditionally the case but cash rotating into bonds due to the record low interest rates on cash in the USA. I feel really sorry for the savers over there.
I suspect that interest rates will only rise when the Fed decides they should. Possibly not even then as continued foreign purchases of Treasuries can reduce the normally high correlation between short-term and long-term rates (first observed under Greenspan with large Chinese capital inflows).
Capital outflows and a falling dollar would be a bullish sign for US industry, increasing their competitiveness.
I suspect that rates would rise when the Fed decides they do as well. However, my understanding is that to keep rates low they will have to keep selling a lot of bonds/bank notes in the market which I understand is required to keep rates low. My understanding is that the Fed is basically funding the budget deficit by printing the money and to me that is showing a lack of demand, foreign and domestic, for their bonds.
Whilst a falling dollar would be good for US industry, in my opinion it would also make the cost of living quite high for the average US consumer as they are a net importer of goods and more dollars would be required to import the same amount of goods. Oil would be one product that would become more expensive and this of course would have a negative impact on the US economy at least in the short to medium term.
As I write, the spread between the 5 and 10 year bonds is less than 1%.
Hi Adam, The Fed increases the money supply when they buy bonds. Their balance sheet reflects the following changes: +Bond asset, +Deposit liability to commercial banks (which can be converted to currency as required).
I agree that the demand for bonds is artificial and rates do not match underlying supply and demand.
Consumer prices would rise if the dollar falls, but so would earnings — from increased exports and import substitution as well as inflation. Jobs would also rise with increased net exports — and promote further sales growth — creating a self-reinforcing spiral: the path to recovery.
Thanks Colin, I often get the buying and selling of bonds and effect on money supply the wrong way around. That would explain how the Fed buying of bonds is increasing the money supply. I guess this would be the lesser of two ‘evils’ with the austerity in Europe.
Yes. Market Monetarists believe that the Fed should continue to buy bonds until nominal GDP reaches some targeted growth rate like 4%. If NGDP growth exceeds this figure, they would sell bonds. This is a lot more accurate than the inflation targeting currently employed by the Fed — and would help to keep inflation under control while also preventing a repeat of the recent housing bubble.
There are some good articles here by Scott Sumner and Lars Christensen on NGDP targeting.
Hi Colin, Curious about your comment of a june quarter close below 1500 on the SP giving a long term bear signal, any more you can share there? On the gold I commented on the daily and weekly flag patterns and noted the 12/13 april close failed the retest of the outside of daily chanel therefore no trade to long side and the follow through on Monday 15th broke through the weekly also equal to no trade. For now it looks technically broken goods. Again i am looking for the retest of the underside of these lines of which the weekly closed on it last friday at 1470 ish but waiting for daily signal around 1510 to then retest 1350. Any pop up above that line that finds support on daily all bets are off for bear trap.
See S&P 500: Any Gas Left In The Tank?