Summary
- Global long bond yields are rising, driven by fears over government debt levels
- A sharp jump in services CPI warns of rising inflation in the broad economy
- Strong liquidity boosts demand for stocks and for gold
Global long bond yields are rising, driven by fears over government debt levels.
Japan’s 30-year JGB yield jumped to a record 3.20% on Tuesday as opposition parties favoring tax cuts and loose monetary policy are expected to gain influence after the July 20 election. (Reuters)
German 30-year government bond yield is testing resistance at 3.26%, the highest since 2011. Investor concerns are focused on increased debt issuance—to fund defense and infrastructure spending—and rising international rates. (Reuters)
The 30-year US Treasury yield is testing resistance at 5.0%, the highest since 2007. The monthly charts below provide a long-term perspective.
10-year Treasury yields are expected to follow, testing resistance at 5.0%.
Rising yields are driven more by long-term structural issues than immediate concerns over an uptick in inflation.
CPI Inflation
CPI growth jumped to 2.7% for the twelve months to June, while core CPI, excluding food and energy, increased by 2.9%.
Sticky price CPI and the 16% trimmed mean, reflecting underlying inflationary pressures, jumped to 2.5% and 3.2% respectively.
More surprising was the sharp rise in CPI for services, excluding shelter, which is less affected by tariff increases than goods. The June figure is close to a 7.0% annual growth rate.
This confirms the earlier ISM Services PMI, which showed a sharp rise in the Prices sub-index in May and June. According to the ISM, fourteen of eighteen service industries reported increased prices paid in June. (ISM)
Energy
Energy CPI showed negative growth for the twelve months to June, contributing significantly to the overall low headline CPI rate.
Shelter
Shelter CPI comprises 35% of headline CPI. However, compared to the Case-Shiller 20-City Composite Home Price Index below, we find the index highly artificial and misleading.
Food
Food CPI growth increased in June to an annualized rate of 3.8%.
Stocks
The S&P 500 eased slightly in response to the CPI increase, but this is hardly noticeable on the monthly chart below.
The Dow Jones Industrial Average retreated from resistance at 45K. However, rising Trend Index troughs signal long-term buying pressure, and a breakout above 45K would confirm the S&P 500 bull market signal.
Financial Markets
Moody’s Baa Corporate bond spread declined to 1.73% after a sharp spike in March-April, indicating ready credit availability.
The uptrend in Bitcoin indicates strong animal spirits, which are likely to spill over to stocks.
Dollar & Gold
The US Dollar Index is retracing to test resistance at 100 on the monthly chart below. Respect will likely confirm another decline, and our target of 90.
Gold is consolidating in a bullish pennant on the monthly chart. Rising Trend Index troughs also signal buying pressure. A breakout above 3450 would strengthen our target of 4000 by year-end.
Conclusion
Long bond yields are rising due to concerns over precarious public debt levels and growing fiscal deficits.
Inflation is still a secondary consideration, but a sharp rise in the CPI for services in June warns of higher inflation in the broader economy. Services are less impacted by tariffs, which are only likely to affect CPI after current pauses have expired and tariff rates are settled.
Liquidity remains strong, supporting high stock prices. A Dow Jones Industrial Average breakout above 45K would confirm the S&P 500 bull market signal.
Demand for gold is also strong, and a breakout above $3,450 per ounce would signal another advance, strengthening our target of $4,000 by year-end.
Acknowledgments
- CoinDesk: Bitcoin
- Federal Reserve of St Louis: FRED Data
- Reuters: Japan bond market blows out as election angst grips investors
- Institute for Supply Management: ISM Report on Business
- Reuters: German 30-year yield hits 21-month top, continuing steady march higher
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.