ASX Weekly Market Snapshot

Bull-Bear Market Indicator
Stock Market Pricing Indicator

The dial on the left indicates bull or bear market status, while the one on the right reflects stock market drawdown risk.

Bull/Bear Market

The ASX Bull-Bear Market indicator remains at 54%, with three of six leading indicators signaling risk-off, while the US bull-bear index (a 40% weighting) is at 60%:

Bull-Bear Market Indicator

The ASX 200 continues in a strong downtrend relative to the gold price in Australian Dollars.

ASX 200 Index Relative to Gold in AUD

The ASX 200 Financials Index (XFJ) is retracing to test resistance at 8500, but remains in a primary downtrend.

ASX 200 Financials Index

Stock Pricing

ASX stock pricing increased to the 76.18 percentile compared to 74.05 two weeks ago, and a high of 85.83 in February.

Stock Market Value Indicator

The Stock Pricing indicator compares stock prices to long-term sales, earnings, and economic output to gauge market risk. We use z-scores to measure each indicator’s current position relative to its history, with the result expressed in standard deviations from the mean. We then calculate an average for the five readings and convert that to a percentile. The higher that stock market pricing is relative to its historical mean, the greater the risk of a sharp drawdown.

Conclusion

The ASX bull-bear indicator at 54% indicates a mild bear market.

We are entering a bear market, and the risk of a significant drawdown is high.

Acknowledgments

US Weekly Market Snapshot

Bull/Bear Market Indicator
Stock Market Pricing Indicator

The dial on the left indicates bull or bear market status, while the one on the right reflects stock market drawdown risk.

Bull/Bear Market

Our Bull/Bear Market indicator is unchanged at 60%, with two of the five leading indicators signaling risk-off:

Bull-Bear Market Indicator

We replaced the Coincident Economic Activity Index with Current Economic Conditions from the University of Michigan’s monthly consumer survey. The UOM index offers earlier recession warnings—when the 3-month moving average crosses below 100—and more timely updates.

University of Michigan: Current Economic Conditions

The current reading of 68.20 is a strong bear signal. The Fed Funds target rate is also in a bear cycle, but the two require confirmation from one of the following two indicators:

If the Chicago Fed Financial National Conditions Index rises above -0.40.

Chicago Fed National Financial Conditions Index

Or the S&P 500 30-week Smoothed Momentum crosses below zero.

S&P 500

Stock Pricing

Stock pricing eased slightly to the 95.67th percentile from a high of 97.79 six weeks ago. However, the extreme reading still warns that stocks are at risk of a significant drawdown.

Stock Market Value Indicator

The Stock Pricing indicator compares stock prices to long-term sales, earnings, and economic output to gauge market risk. We use z-scores to measure each indicator’s current position relative to its history, with the result expressed in standard deviations from the mean. We then calculate an average for the five readings and convert that to a percentile. The higher that stock market pricing is relative to its historical mean, the greater the risk of a sharp drawdown.

 

Conclusion

There’s little change this week. We are close to a bear market, with the bull-bear indicator at 60%. Stock pricing is still extreme, highlighting the risk of a significant drawdown.

Acknowledgments

Inflation, the third certainty

In this world nothing can be said to be certain, except death and taxes. ~ Benjamin Franklin

That may have been true in 1789, but since President Richard Nixon ended the dollar’s convertibility to gold in 1971, we live with a third certainty: inflation.

Ending convertibility to gold lifted the restraint on central banks to limit the creation of new money; otherwise, they would face a run on their gold reserves (or USD reserves linked to gold).

This resulted in a rapid decline in the dollar’s value. Today, the dollar has the same purchasing power as 9.2 US cents in 1960.

Decline of Dollar Purchasing Power

There have still been brief periods of deflation, most notably in 2009 during the global financial crisis.

Deflation in 2009

But central banks are well aware of the danger. The 1929 Wall Street crash and subsequent banking crisis caused a deflationary spiral as money in circulation contracted.

Deflation in 1930s

Whenever prices threaten to deflate, the Fed swiftly expands the money supply to counter the contraction. The graph below shows the rapid expansion of the monetary base relative to GDP after the 2008 global financial crisis and during the 2020 COVID pandemic.

Monetary Base to GDP

While inflation is inevitable, its rate varies and is determined by various factors, including money supply growth, wage rates, oil prices, and other external shocks.

The globalization of international trade introduced a new form of deflationary supply shock, especially after China joined the WTO in 2000 and was granted favored nation status by the US Congress. Low wages, industrial subsidies, and low health and environmental standards enabled the new entrant to undercut industry in developed economies, flooding international markets with low-priced manufactured goods.

Central banks pushed back with fiscal deficits and monetary expansion to soften the impact on their economies. Unfortunately, the stimulus flowed to the top 10% while the bottom half bore the costs.

Globalization in reverse

We now face a new challenge: the reversal of globalization through increased tariffs and other trade barriers.

According to Stephen Mirran, Donald Trump’s chief economic adviser, tariffs on imports will offer three main benefits. First, tariffs are a new source of tax revenue, enabling Congress to reduce corporate and individual tax rates and stimulate economic growth. Second, tariffs increase the cost of imports and encourage investment in domestic industries while imports decline. Third, the real clincher is that foreign exporters are forced to absorb the cost of the tariff, not the US taxpayer.

It doesn’t quite work like that.

The first benefit will only occur if trading partners don’t retaliate with their own tariffs. Second, imports will only decline if the dollar doesn’t strengthen as it did in 2018.

Chinese Yuan USD

Third, foreign exporters will only bear the cost of the tariff if the dollar strengthens and imports don’t decline—the last two benefits conflict. The more imports decline, the more the US consumer will bear the cost of tariffs instead of foreign exporters.

Why we are concerned about inflation

A Weak Dollar

The dollar has weakened considerably since the announcement of tariffs. The administration’s on-again-off-again tariff policies have raised uncertainty and reduced growth expectations, causing a 50-basis-point fall in the 10-year Treasury yield and a similar decline in the Dollar Index.

The weaker dollar should ensure that US consumers bear the cost of the tariffs, and even the prices of goods not subject to tariffs will rise.

Trade War

Retaliatory tariffs by trading partners are likely to increase the cost of imported goods to US consumers, especially if the dollar weakens.

The best way to minimize retaliation would be to implement tariffs gradually and quietly, or pretty much the opposite of what has happened so far. ~ Joseph Calhoun

Higher Domestic Prices

US consumers will also likely pay higher prices to domestic producers who would be uncompetitive without the tariffs.

Recession

A trade war would likely cause a recession, pushing the Fed to cut rates while falling tax receipts would increase the fiscal deficit. A recession would initially ease inflation, but increased deficits and stimulatory measures by the Fed would likely increase inflationary pressure over time.

Fiscal Dominance

The dollar is weakening as its status as the global reserve currency diminishes, as evidenced by the soaring gold price.

Spot Gold

Foreign purchases of US Treasuries are declining as a percentage of GDP, which has increased upward pressure on yields.

Federal Debt to GDP: Percentage of Foreign Investors

The Fed will likely attempt to suppress long-term rates by opening up new sources of demand for Treasuries. While further Treasury purchases (QE) by the Fed are unlikely, they may attempt to achieve a similar result by relaxing the supplementary leverage requirement for Treasuries. With no SLR constraint, commercial banks can leverage Treasury purchases to infinity. This would make UST an attractive investment for commercial banks and has been done before, in 2008, to boost commercial bank support for Treasury markets.

“We might actually pull treasury bill yields down by 30 to 70 basis points. Every basis point is a billion dollars a year.” ~ Treasury Secretary, Scott Bessent

After the Silicon Valley Bank (SVB) debacle, commercial bank demand will likely focus on T-bills without much impact on the long end of the yield curve.

Bank purchases will effectively swap bank reserves at the Fed for T-bills to be held on their balance sheets, cutting out the Fed as the middleman. With QE, the Fed typically pays for Treasuries purchased by crediting banks with increased reserves, which are a liability of the Fed, and holding the securities as an asset on their balance sheet.

This does not expand the money supply and is not in itself inflationary. However, increased reliance on the Fed and commercial banks to fund the government increases the risk of fiscal dominance.

Fiscal dominance is when a country’s debt and deficit are so high that monetary policy focuses on keeping the government solvent instead of controlling inflation. ~ Simplicable

Inflation: A Soft Default

The $36 trillion in US federal debt is too large to be repaid.

Federal Debt

Debt reduction would require reversing the current fiscal deficits of $1.5 to $2.0 trillion to a surplus of at least $1.0 trillion. The shock to the economy would cause a decades-long recession similar to the UK after WWII.

Treasury Secretary Scott Bessent on reducing the deficit:

I was with one of the congressional budget committees two weeks ago, and they really want to cut this fast. And I said, you do realize every 300 billion we cut is about a percentage GDP, so you, we are trying to land the plane.

Long-term austerity is most unlikely, and the only viable alternative is to inflate the debt away, boosting nominal GDP to the point that the debt ratio to GDP declines to about half its current level.

Federal Debt to GDP

Conclusion

China and the EU, the US’s two biggest trading partners, will likely retaliate if it increases import tariffs. They will also likely withdraw investments from US financial markets over time. This is expected to drive up inflation and long-term interest rates, leaving the Fed with a stark choice. Fiscal dominance means that the solvency of the Treasury is likely to be prioritized over inflation. Especially after May 2026, when the current Fed chair’s term ends, he will likely be replaced with a more pliant Trump appointment.

Inflation is inevitable. Buy gold and defensive stocks on reasonable earnings multiples. Avoid high-multiple growth stocks and long-term Treasuries.

Acknowledgments

Fed sits tight as economic outlook darkens

The Fed has kept the funds rate steady at 4.25% to 4.5% since December. The threat of a trade war and the increased risk of a sharp price jump have ensured Fed caution over further rate cuts. The FOMC dot plot below shows four participants expect no cuts this year, another four expect one cut of 25 basis points, and eight more expect a total of 50 basis points.

FOMC Dot Plot

FOMC projections identify rising uncertainty over GDP growth and greater risk of an undershoot.

FOMC: GDP Risk

Consumer expectations of inflation soared in the March University of Michigan survey, with the median price increase in the next year jumping to 4.9%.

University of Michigan: 1-Year Inflation Expectations

Expectations of future conditions fell sharply to 54.2.

University of Michigan: Consumer Expectations

Stocks were buoyed by Fed Chair Jerome Powell’s view that tariff-driven inflation will be “transitory” and largely confined to this year. (Reuters)

The Dow Industrial Average rallied to test resistance at the former primary support level of 42,000.

Dow Jones Industrial Average

The S&P 500 recovered some ground but encountered resistance at 5700, below the former primary support level.

S&P 500

Long-term Treasury yields benefited from the outflow from equity markets in February and March, with the 10-year testing support at 4.1% before increasing to 4.25%. A further fall in stocks would likely cause a short-term softening of UST yields.

10-Year Treasury Yield

Upward pressure on US Treasury yields will likely come from doubts over the current administration’s economic strategy and concerns over a debt-ceiling stoush. US credit default swap spreads (CDS) have increased by 200% since December.

United States Treasury: 1-Year Credit Default Swaps

A sharp upturn in the Chicago Fed National Financial Conditions Index warns of tightening financial conditions, with credit spreads widening.

Chicago Fed National Financial Conditions Index

The Fed confirmed they will reduce the monthly redemption cap on Treasury securities from $25 billion to $5 billion. This will slow the withdrawal of liquidity from the Treasury market through the QT program.

Conclusion

The Treasury market has shown that it is still vulnerable to thin demand and requires Fed support to maintain liquidity in the long-term end of the curve. The Fed has been forced to cut monthly QT for Treasury securities to $5 billion. At the new rate, it would take the Fed more than 70 years to shed its present holdings of $4.24 trillion.

Fed Security Holdings

Stocks are rallying but are unlikely to reverse the recent bear market signal.

Acknowledgments

Why Australian CPI is understated

CPI grew by 2.5% (Y/Y) in January 2025 while the trimmed mean increased slightly to 2.8%, still comfortably within the RBA’s 3.0% target.

Australian CPI & Trimmed Mean CPI

However, the Labor government has found a neat trick to make inflation appear lower while also boosting GDP growth figures.

According to the ABS, electricity prices are falling. The CPI measure shows a 35% drop for the 12 months to October 2024, with prices still declining year-on-year despite a 22.0% increase in November and an 8.9% increase in January.

Australian CPI: Electricity

The chart below shows that actual prices (light blue) increased by 17% since June 2023, while the official figures (dark blue) show an 8.0% decline.

Australian CPI: Electricity Costs & Rebates

The difference is government electricity rebates, which are offset against actual electricity costs:

a) Introduction of the 2023-24 Energy Bill Relief Fund (EBRF) rebates

b) Introduction of the first instalment of 2024-25 Commonwealth rebates for all households in QLD and WA, and State rebates in QLD, WA and TAS

c) Introduction of the first instalment of 2024-25 Commonwealth rebates for all households in NSW, VIC, SA, TAS, NT and ACT

d) Introduction of the second instalment of 2024-25 Commonwealth rebates for all households in NSW, VIC, QLD, SA, TAS, NT and ACT

e) Introduction of the second instalment of 2024-25 Commonwealth rebates and State rebate for all households in WA

f) Introduction of the third instalment of 2024-25 Commonwealth rebates for all households in NSW, VIC, QLD, SA, TAS, NT and ACT

Australians have been pushed into higher tax brackets by inflation and, rather than lower tax rates, the government gives you a rebate on your electricity bill. It makes no difference to the consumer, but it makes a difference to the government facing an election where inflation is one of the key issues. Not only does the rebate make inflation look lower, but it is classed as government expenditure in the national accounts, and is added to GDP making growth look higher.

It is such a neat trick; they used it more than once.

Rent inflation is another politically sensitive subject. The official figures show rent inflation declined to 5.8% (Y/Y) after peaking at 7.8% in August 2023.

Australian CPI: Rent

Low vacancy rates and tight rental markets have driven up rents in most capital cities. However, according to official figures, rent inflation slowed to a 0.1% rise in September 2024, followed by a 0.3% fall in October. The fall was due to an increase in Commonwealth Rent Assistance (CRA). From 20 September, the maximum rate available for rent assistance was increased by 10% on top of the usual biannual CPI indexation, reducing rents for eligible tenants.

Actual Rent prices increased by 0.5% in September and October 2024, excluding the CRA changes, a 0.6% difference.

In the previous year, a 15% increase in the maximum CRA rate reduced the official measure by 1.5% over September-October 2023.

Conclusion

Electricity inflation was understated by 14% (18% actual – 4% CPI) in the 12 months to January 2024 and by 10.7% in the 12 months to January 2025.

Rent inflation was understated by 1.5% in the 12 months to January 2024 and 0.6% in the 12 months to January 2025.

Headline CPI is understated by 0.68% over the last two years.

Acknowledgments

Notes

  1. The impact of electricity and rental understatement on CPI was 0.42% in the year to January 2024 (weightings of 2.36% and 6.03%, respectively) and 0.24% in January 2025 (weightings of 1.84% and 6.61%, respectively).

Strong uptrends in stocks and gold

A longer-term view, with weekly charts, shows stocks and gold in a healthy bull market. The energy sector is bearish, indicating low short- to medium-term inflation, as are industrial metals.

Stocks

The S&P 500 closed above 6100, signaling a fresh advance. Expect retracement to test the new support level, but respect will likely confirm a target of 6400.

S&P 500

Mega-cap technology stocks are the primary driver, with large caps lagging. Lower Trend Index peaks on the S&P 500 equal-weighted index ($IQX) warn of selling pressure, and another test of primary support at 7000 is likely.

S&P 500 Equal-Weighted Index

Financial Markets

Bitcoin consolidates above 90K, indicating stable liquidity in financial markets.

Bitcoin (BTC)

Treasury Markets

The 10-year Treasury yield signals another test of support at 4.4%. Respect is more likely, and another test of 4.8% would be bearish for stocks.

10-Year Treasury Yield

Dollar & Gold

The Dollar Index has weakened in the last two weeks as the Trump administration threatens to disrupt the global trading system with increased tariffs. Respect of support at 106 remains likely, but a breach would offer a target of 102.

Dollar Index

Gold is in a strong uptrend. The current retracement will likely respect support at $2,800 per ounce, confirming our target of $3,000.

Spot Gold

Energy

Crude is in a bear market, with Nymex WTI crude respecting resistance at $80 per barrel. We expect crude to remain range-bound for most of the year.

Nymex WTI Crude

We are long-term bulls on uranium, but there are no buy opportunities. The Sprott Physical Uranium Trust (SRUUF) confirmed the bear market, breaking support at 16 to signal another decline.

Sprott Physical Uranium Trust (SRUUF)

Copper

Copper rallied strongly over the last two weeks, testing resistance near 10K. However, the move is not driven by an increase in end-user demand. From Mining.com:

Worries that US President Donald Trump may impose tariffs on copper had spurred traders and investors to buy copper on the US COMEX exchange and sell on the LME.

Short or bearish positions on the LME are being cut or rolled over ahead of settlement on Wednesday, turning discounts for nearby copper contracts against those further along the maturity into premiums or backwardations.

Copper

Iron & Steel

Iron ore continues its gradual downtrend.

Iron Ore

Australia

The ASX 200 recovered above resistance at 8500, confirming a medium-term target of 8900.

ASX 200 Index

Conclusion

US and Australian stocks are in an uptrend, supported by strong liquidity in financial markets. However, the Trump administration’s trade policies have unsettled markets, making them susceptible to higher-than-normal volatility.

Bonds are in a bear market, and the 10-year Treasury yield is expected to resume its uptrend.

Gold continues in a strong uptrend, with demand driven by geopolitical changes. Respect of support at $2,800 per ounce would confirm our short-term target of $3,000.

Industrial metals remain in a bear market due to weak demand from China.

 

 

 

Inflation spooks Treasuries and stocks

Rising inflation expectations and robust economic data mean the Fed will likely pause rate cuts for several months. Stocks reacted negatively, but gold seemed unfazed.

The US economy shows slow but steady growth, with total weekly hours worked growing at an annual rate of 1.0% compared to real GDP at 2.5% in 2024.

Real GDP & Total Hours Worked

Heavy truck sales, a reliable leading indicator, fell sharply in December but rebounded to a robust 44.5K in January.

Heavy Truck Sales

Another reliable leading indicator is employment in cyclical sectors, which also shows robust growth. In a recession, manufacturing, construction, and transportation & warehousing typically shed far more jobs than the rest of the economy.Employment in Cyclical Sectors: Manufacturing, Construction, and Transport & Warehousing

ISM Survey

ISM business surveys show continued expansion in the services sector in January.

ISM Services PMI

It was joined by a manufacturing recovery above 50% after 26 months of contraction.

ISM Manufacturing PMI

Labor Market

The labor market added a modest 143K jobs in January.

Employment Growth

However, the unemployment rate fell to 4.0% from 4.2% in November, possibly aided by a surge in deportations.

Unemployment

Average weekly hours worked fell to 34.1 for the first time since the 2020 pandemic. This typically serves as an early warning of increased layoffs. Employers first cut back hours before shedding staff.

Average Weekly Hours

Lower weekly hours is contradicted by the JOLTS report, which showed job openings exceeding unemployment in December.

Job Openings

Average Hourly Earnings

A sharp increase in average hourly earnings, showing 4.1% growth for the 12 months to January, will likely cause concern at the Fed.

Average Hourly Earnings

December earnings growth surprised, at close to 0.5% for the month or 5.7% annualized.

Average Hourly Earnings - Monthly

University of Michigan Survey

Consumer sentiment dipped slightly in February, with the 3-month moving average declining to 71. Sentiment remains below levels during the 2020 pandemic.

University of Michigan: Consumer Sentiment

The current economic conditions index declined to 68.7 in February, but the 3-month MA is still rising.

University of Michigan: Current Economic Conditions

Expectations are also falling, with the 3-month MA declining to 70.

University of Michigan: Consumer Expectations

Financial markets were spooked by the sharp jump in expected price increases in the next 12 months, which reached 4.3% in February, with the 3-month MA at 3.5%.

University of Michigan: 1-Year Inflation Expectations

Five-year inflation expectations are also rising, with the 3-month MA climbing to 3.2% in February.

University of Michigan: 5-Year Inflation Expectations

Treasury Market

Ten-year Treasury yields rallied in response to the stronger inflation outlook, testing resistance at 4.5%. Recovery above the descending trendline would warn of another advance.

10-Year Treasury Yield

Stocks

The S&P 500 fell sharply in response to the prospect of higher interest rates. Breach of 5850 would signal a test of primary support at 5800.

S&P 500

Dollar & Gold

The Dollar rallied, testing resistance at 108 in response to higher interest rates. Breakout would offer a short-term target of 110.

Dollar Index

Gold is retracing to test support at $2,850 per ounce. Respect would signal a test of $3,000.

Spot Gold

Silver broke its new support level at $32 per ounce, warning of retracement to test $30.

Spot Silver

Conclusion

Strong growth in average hourly earnings and rising consumer inflation expectations will likely cause the Fed to pause rate cuts until the current uptrend reverses. That could take more than six months.

10-year Treasury yields are expected to resume their uptrend. Recovery above 4.5% would confirm.

Rising long-term yields are bearish for stocks, with the S&P 500 likely to test primary support at 5800.

The Dollar Index is also expected to resume its uptrend. Breakout above 108 would signal another test of resistance at 110.

Gold is expected to continue its uptrend, with a breakout above $2,900 per ounce signaling a test of $3,000 for the first time. Rising inflation expectations and increased bullion holdings by foreign central banks will likely maintain a shortage of physical gold.

Acknowledgments

US Weekly Market Snapshot

Bull/Bear Market Indicator
Stock Market Pricing Indicator

The dial on the left indicates bull or bear market status, while the one on the right reflects stock market drawdown risk.

Bull/Bear Market

The Bull/Bear Market indicator rebounded to 60%, due to data revisions to heavy truck sales. Two of the five leading indicators now signal Risk-off:

Bull-Bear Market Indicator

Heavy truck sales were revised up to a seasonally adjusted 37,823 units in December, after an earlier report at 35,152 units. January sales jumped to a hot 44,499 units confirming that economic activity is not slowing.

Heavy Truck Sales (units)

This is the second time that a heavy trucks data revision has affected our model. We will investigate using a 3-month moving average to reduce the impact of revisions.

Stock Pricing

Stock pricing eased slightly to 97.75 from the 97.91 percentile two weeks ago. The extreme reading continues to warn that stocks are at risk of a significant drawdown.

Stock Market Value Indicator

The Stock Pricing indicator compares stock prices to long-term sales, earnings, and economic output to gauge market risk. We use z-scores to measure each indicator’s current position relative to its history, with the result expressed in standard deviations from the mean. We then calculate an average for the five readings and convert that to a percentile. The higher that stock market pricing is relative to its historical mean, the greater the risk of a sharp drawdown.

Conclusion

We are close to a bear market, with the bull-bear indicator revised to 60%. Stock pricing remains extreme, increasing the risk of a significant drawdown, warning not to increase exposure to risk assets like growth stocks.

Acknowledgments

Gold riding high as the Dollar weakens

A weakening Dollar has further boosted gold, lifting it above resistance at $2,800 per ounce. Treasury yields are also falling as anticipated inflation declines. However, volatility remains high, and we need to stay focused on the long-term trend.

Treasury Markets

Ten-year Treasury yields broke support at 4.5% with declining Trend index peaks indicating selling pressure. We expect a correction with a target of 4.2%.

10-Year Treasury Yield

The Dollar

The Dollar Index surprised, retreating below 108. Another test of support at 107 is likely, with declining Trend Index peaks indicating selling pressure.

Dollar Index

Gold and Silver

Gold soared to an intra-day high of $2,880 per ounce, with rising Trend Index troughs signaling strong buying pressure. The breakout offers a short-term target of $3,000. A retracement that respects new support at $2,800 would strengthen the signal.

Spot Gold

Silver broke resistance at $32 per ounce before retracing to test the new support level. Respect would confirm a target of $35.

Spot Silver

Conclusion

Donald Trump’s threat and quick reversal of tariffs on Canada and Mexico precipitated Dollar weakness in the past few sessions.

A deliberate strategy to weaken the Dollar would likely yield better results for the US than tariffs. Tariffs risk retaliation from trading partners and undermine domestic industry’s long-term competitiveness in export markets.

A public policy to weaken the Dollar would likely face bitter opposition from Wall Street, which has long profited from the Dollar as a global reserve currency. Behaving like a bull in a China shop, however, may achieve the same ends for Trump, while he can deny that it was ever his intention.

However, we should not trade hunches and need to base our strategy on what we can clearly see. The dollar index’s long-term trend remains upward.

Dollar Index

The Treasury market shows surprising strength, with the 10-year yield breaking support at 4.5%. Bond market reaction to Fed rate cuts last year drove long-term yields higher, but upward pressure has eased now that the Fed has paused. Fears of a rebound in inflation are fading, lowering the term premium.

The long-term view, however, shows a continued uptrend.

10-Year Treasury Yield

Lower Treasury yields and a weak Dollar are both bullish for gold, which has broken resistance at $2,800 per ounce and is likely to test $3,000 in the next few weeks.

Silver lags gold because of far larger industrial demand, which is not expected to expand at the same rate.

Japanese inflation bullish for US stocks

Japanese inflation climbed to 3.6% for the 12 months to December 2024, a sharp increase from 2.9% in November.

Japanese Inflation Rate - Annual

Wages growth is even hotter, according to Jim Grant:

Wage growth is on the march in Japan, as nominal cash earnings jumped 4.8% in December from the prior year period, blowing past the 3.7% consensus to mark the hottest single reading since 1997. That striking data point further stokes an inflationary impulse which left nationwide CPI at a meaty 3.6% year-over-year clip in December.

Accordingly, a reluctant Bank of Japan has been forced into action, hiking overnight interest rates by one quarter percentage point to 0.5% late last month, its most restrictive rate stance since early 2008. However, EZ-money-minded Kazuhiro Masaki, director-general of the BoJ’s monetary affairs department, stuck to his rhetorical guns in an address to parliament this morning, declaring that “we must support economic activity with loose monetary policy.”

Not so fast, Goldman Sachs believes. Further tightening is in the offing as soon as July per predictions from senior Japan economist Tomohiro Ota, with benchmark borrowing costs poised to reach 1.5%, a level unseen for 30 years.

The Yen strengthened in recent weeks, with lower Trend Index peaks indicating buying pressure (selling pressure for the USD cross). Breach of support at 150 would signal another test of 140.

Japanese Yen

A stronger Yen is typically bullish for bonds, with the 10-year Treasury yield (gray) declining in synch with the Yen/Dollar exchange rate (blue).

10-Year Treasury Yield & Japanese Yen

A strong Yen is also typically bullish for stocks, with the S&P 500 (navy) rising when the Yen/Dollar exchange rate (blue) declines.

S&P 500 & Japanese Yen

Conclusion

The Bank of Japan is expected to hike the overnight rate by 100 basis points in 2025, to a level not seen in 30 years. Rate hikes are likely to significantly strengthen the Yen against the Dollar, with a medium-term target of 140.

A sharp fall in the exchange rate increases financial market volatility in the US as carry trades unwind. However, a strong Yen typically coincides with falling long-term US Treasury yields, which would be bullish for stocks.

Acknowledgments