Ten-year Treasury yields rallied for the last two weeks but remain in a down-trend. Respect of resistance at 2.60% would warn of another decline.
Inflation is subdued and it would be difficult for the Fed to motivate a rate cut when inflation is close to its 2.0% target. The consumer price index (CPI) came in at 1.86% for the 12 months to March 2019, while the more stable Core CPI (ex- Food & Energy) remains close to target at 2.04%.
After price stability, the second part of the Fed’s dual mandate is to maintain maximum sustainable employment. A review of the last three cycles shows the Fed raising the funds rate (FFR) to curb inflation and then being forced to cut (red highlights) when growth in employment slows.
Total non-farm payrolls are currently growing at close to 2.0%. The Fed would normally need payroll growth to slow by at least 1.0% to motivate a rate cut. The exception is if inflation falls below target, then the Fed may act sooner.
The S&P 500 is headed for another test of its high at 2950, while Trend Index (13-week) recovered to signal moderate buying pressure.
The Nasdaq 100 is similarly testing its earlier high at 7700.
Momentum is slowing and we can expect stubborn resistance at the former highs.
Colin Twiggs is a former investment banker with almost 40 years of experience in financial markets. He co-founded Incredible Charts and writes the popular Trading Diary and Patient Investor newsletters.
Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.
Focusing on interest rates and financial market liquidity as primary drivers of the economic cycle, he warned of the 2008/2009 and 2020 bear markets well ahead of actual events.
He founded PVT Capital (AFSL No. 546090) in May 2023, which offers investment strategy and advice to wholesale clients.