Big Beautiful Bill threatens bond market blowout

Summary

  • The bond market reacted to the record tax and spending bill in Congress that extends tax cuts for corporations and the wealthy
  • The bipartisan Committee for a Responsible Federal Budget estimates the bill would add between $3.3 trillion and $5.2 trillion to the US federal debt, depending on whether policymakers extend temporary provisions
  • A weak bond auction lifted long-term yields
  • The dollar fell, while gold climbed above 3300

I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody.

~ James Carville, political consultant and lead strategist for Bill Clinton’s successful 1992 presidential campaign.

10-Year Treasury Yield
Weak bond auction

A $16 billion auction of 20-year Treasury bonds on Wednesday attracted less than usual interest, with yields rising to 5.127% after the auction.

“We’ve seen several soft 20-year bond auctions and it has a checkered history as a benchmark issue,” said Thomas Simons, chief U.S. economist at Jefferies in New York. “This one was not one of the best by any stretch of the imagination, but it also wasn’t one of the worst.”

Simons said while the auction was “far from a disaster,” it showed there was not going to be a reversal in the sell-off at the long end of the yield curve anytime soon. (Reuters)

Why is this a problem?

Liz Ann Sonders, Charles Schwab’s chief investment strategist, responded to a question on CNBCIs 4.58% on the 10-year a problem for the bond market?

It’s not so much the level that matters, it’s the “Why?” If this was driven by the growth trajectory, that would be great. But the fact is it’s driven by uncertainty with regard to inflation, and the Fed’s expected reaction. The wattage on the spotlight aiming at the debt and deficit has been turned up. The investor class cares deeply about this issue but the average voter can’t even conceptualize what 30-plus trillion dollars means and doesn’t tend to vote based on this. This spotlight on the issue is a good thing and will increase the chance that something gets done.

President Trump’s “big, beautiful” tax bill

The House Rules Committee advanced President Trump’s “big, beautiful” tax bill late Wednesday after 21 hours of debate and amendments, sending the legislation to the floor where it is expected to receive a final vote early Thursday morning.

The package includes a major spending increase for immigration enforcement and the military, and it would extend Trump’s 2017 tax cuts, which are scheduled to expire at the end of this year. It includes a series of cuts to Medicaid, food assistance, and clean energy funding to pay for the trillions of dollars in tax cuts and new red ink. (CNBC)

The bipartisan Committee for a Responsible Federal Budget estimates the bill would add between $3.3 trillion and $5.2 trillion to US federal debt by 2034, depending on whether policymakers extend temporary provisions. (Reuters)

Rep. Chip Roy, R-Texas, and House Freedom Caucus chair Andy Harris, R-Md., were among the members who met with Trump at the White House Wednesday afternoon, in a hastily arranged effort to convince fiscal hawks to set aside their objections and back the deficit-exploding package of tax cuts.

Meanwhile, markets tumbled on concerns that Trump’s spending bill would pass, leading to exploding federal deficits and weaker long-term fiscal health. The yield on the 30-year Treasury bond hit 5.09%. (CNBC)

The Dollar & the Dow

The dollar weakened, with the US Dollar Index breaking below 100. Follow-through below 98 would warn of a long-term decline with a target of 90.

Dollar Index

The Dow Jones Industrial Average closed below its former primary support level at 42K. A follow-through below 41.5K would close the recent gap, signaling another test of primary support at 37K.

Dow Jones Industrial Average

Financial Markets

Recent weakness comes despite a sharp recovery in liquidity, with the Chicago Fed National Financial Conditions Index falling to -0.58.

Chicago Fed National Financial Conditions Index

Bitcoin also reached a new high of 110K, signaling a sharp increase in risk appetite in financial markets.

Bitcoin (BTC)

Gold & Physical Demand

Gold climbed above 3300, headed for a test of the resistance band between 3400 and 3500. A breakout would strengthen our target of 4000 by the end of 2025.

Spot Gold

A 700% year-over-year spike in COMEX physical gold deliveries in May 2025 (16,000 contracts, $5.3 billion), the largest in history, reflects unprecedented physical demand from institutions, possibly including the US government or Treasury. Despite the recent correction, gold’s rally to 3300 demonstrates resilience, with physical demand overwhelming paper price suppression. (Andy Schectman)

Conclusion

President Trump’s “big, beautiful tax bill” threatens a bond market revolt, with a steep rise in long-term Treasury yields if passed. The 10-year Treasury yield respected support at 4.5%, warning of a test of resistance at 5.0%.

Rising long-term yields would likely cause a sharp fall in the Dow and S&P 500.

The bipartisan Committee for a Responsible Federal Budget estimates the bill would add between $3.3 trillion and $5.2 trillion to US federal debt by 2034, depending on whether policymakers extend temporary provisions.

The dollar is weakening, and breakout of the US Dollar Index below 98 would confirm a long-term decline with a target of 90.

Gold is rising, and a breakout above 3500 would strengthen our long-term target of 4000 by the end of 2025.

Acknowledgments

Gold rallies as the dollar weakens

Summary

  • The S&P 500 is consolidating below 6000, and financial market liquidity is improving
  • However, US stocks are underperforming their global counterparts
  • Gold rallies as LT Treasury yields rise and the dollar weakens

The S&P 500 is consolidating between 5800, its former primary support level, and 6000 on the weekly chart below. Breakout to a new high would signal a return to bull market conditions, but we expect strong resistance between 6000 and 6100.

S&P 500

The Dow Jones Industrial Average has similarly recovered above former primary support at 42K, but does not yet signal a reversal to a primary uptrend.

Dow Jones Industrial Average

US stocks continue to underperform their global counterparts, with the broad DJ US Index (DJUS) lagging the Dow Global ex-US ($W2DOW).

DJ US Index ($DJUS) & DJ World ex-US ($W2DOW)

Financial Markets

Bitcoin reached a new high at 107K, signaling strong risk appetite in financial markets.

Bitcoin (BTC)

A sharp fall in high-yield (junk) corporate bond yields signals improving credit availability in financial markets.

Junk Bond Spreads

Treasury Markets

10-Year Treasury yields are retracing to test new support at 4.5%. Respect will likely confirm our target of 5.0%.

10-Year Treasury Yield

Economy

The Conference Board’s leading economic index plunged sharply to 99.4% in April, the 1.0% drop following a 0.8% fall in March. The LEI is blue on the chart below.

Conference Board Leading Economic Index

Widespread weakness across the LEI’s ten components warns of a broad slowing of the economy.

Conference Board Leading Economic Index - Components

The LEI below 100 warns of a recession ahead (black line below), but six-month growth in the LEI (blue below) has not quite reached -4.1%, which would trigger a recession signal (red).

Conference Board Leading Economic Index - Recession Signals

Dollar & Gold

The Dollar Index is retracing to test the band of support between 98 and 100. Breach of support would signal long-term dollar weakness, offering a target of 90.

Dollar Index

Gold found support at 3200 and, after breaking above 3250, is headed for a test of resistance between 3400 and 3500. Our long-term target is 4000 by the end of 2025.

Spot Gold

Silver is testing resistance at 34. Breakout would offer a target of 39.

Spot Silver

Conclusion

The S&P 500 is rallying as financial market liquidity improves, but we expect strong resistance between 6000 and 6100. US stocks continue to underperform their global counterparts, while the Conference Board’s leading economic index warns that the US economy is headed for recession.

10-year Treasury yields are rising, and respect of support at 4.5% would offer a target of 5.0%, another bear signal for stocks. The dollar is weakening, reflecting international capital outflows from US financial markets. A breakout of the Dollar Index below long-term support at 100 would warn of another decline, with a target of 90.

Gold is rising as the dollar weakens, and we expect another test of resistance between 3400 and 3500. Breakout would signal a fresh advance towards our long-term target of 4000 by the end of 2025.

Acknowledgments

Gold rises to a new high while Dow and ASX 200 retreat

The rising uncertainty in financial markets undermined stocks despite solid consumer spending. However, gold rose to a new high, while Germany’s DAX and Hong Kong’s Hang Seng Index also enjoyed strong advances.

The two-day rally on the S&P 500 faded, with a lower close warning of another test of support at 5500. A breach of support would confirm the bear market.

S&P 500

The Dow Industrial Average is in a similar position, hesitating below resistance at 42,000. A reversal below the recent low would again confirm the bear market.

Dow Jones Industrial Average

The Fed is expected to keep interest rates unchanged at this week’s FOMC meeting. The spread between the 2-year (purple) and fed funds rate (gray) shows the market pricing in an average 40 basis points of rate cuts over the next two years.

2-Year Treasury Yield minus Fed Funds Rate below zero warns of Fed rate cuts

Treasury yields remain low, with the 10-year continuing to test support at 4.1%.

10-Year Treasury Yield

However, credit markets are tightening due to rising uncertainty, with high-yield spreads leaping by 160 basis points since the end of January.

Junk Bond Spreads

Consumers

Consumer spending remained reasonably strong in February. New housing starts (purple) recovered due to lower mortgage rates, while February new housing permits (green) held at similar levels.

Housing New Starts & Permits

Thirty-year mortgage rates have eased to 6.65%, in line with softer 10-year Treasury yields.

30-Year Mortgage Rate

Light vehicle sales similarly recovered to nearly 16 million annual units in February.

Light Vehicle Sales

Dollar & Gold

The Dollar Index continues to test support at 103. Breach would offer a target of 100.

Dollar Index

Gold is among the few beneficiaries of the weak dollar and rising uncertainty, advancing to a new high of $3,033 per ounce.

Spot Gold

Australia

The Australian ASX 200 index found short-term support at 7700, but the rally soon faded. A breach of 7700 would confirm the bear market.

ASX 200 Index

The Financials Index displays a dead cat bounce at 8000. Breach of support would further strengthen the bear signal.

ASX 200 Financials Index

Germany

Germany’s DAX is another beneficiary of the uncertainty, threatening a breakout above 23,500 after Germany’s parliament voted in favor of a 500 billion euro fund for infrastructure and easing strict borrowing rules to allow for increased defense spending.

DAX Index

Hong Kong

Hong Kong’s Hang Seng Index also displays a strong advance.

Hang Seng Index

Conclusion

Consumer spending remains robust, but financial markets face rising uncertainty. Widening credit spreads warn of a likely contraction in new investment.

The Dow and S&P 500 rally is fading, and reversal below recent support levels would confirm a bear market.

Australia’s ASX 200 index displays a similar pattern and breach of support at 8000 on the ASX 200 Financials Index would confirm the bear market.

Gold rose to a new high of $3,033 per ounce, while the current turmoil also boosted Germany’s DAX and Hong Kong’s Hang Seng Index.

Acknowledgments

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.

 

 

 

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.

The long game: The Dollar, Gold and US Treasuries

In the short term, the Fed and US Treasury manipulate the Dollar and US Treasury yields in an attempt to stimulate the economy while avoiding inflation. Foreign central banks also attempt to manipulate the Dollar to gain a trade advantage, which impacts the Treasury market. However, in the long term, large secular trends lasting several decades will likely determine the direction of US financial markets and fuel a bull market for gold.

Short-term Outlook

Inflation has moderated, with CPI falling below 3.0%, allowing the Fed to cut interest rates. The fall in headline CPI (red, right-hand scale) was precipitated by a sharp decline in energy prices (orange, left-hand scale).

CPI & Energy CPI

However, inflation could rebound if geopolitical tensions restrict supply or demand grows due to an economic recovery in China and Europe or further expansion in the US.

The Fed has cut its interest rate target by 1.0% from its 2024 peak to stimulate economic activity.

Fed Funds Target Rate: Mid-point

Efforts to normalize monetary policy have reduced Fed holdings of Treasury and mortgage-backed securities by $2 trillion. This would typically contract liquidity, stressing financial markets.

Fed Holdings of Treasuries & Mortgage-backed Securities (MBS)

However, the Fed neutralized its QT operations by reducing overnight reverse repo (RRP) liabilities by nearly $2.3 trillion. Money market funds were encouraged to invest in the enormous flood of T-bills issued by Janet Yellen at the US Treasury instead of in reverse repo from the Fed. The simultaneous reduction in UST assets and RRP liabilities on the Fed’s balance sheet left financial market liquidity unscathed.

Fed Reverse Repo Operations

Long-term Treasury yields climbed despite the Fed reducing short-term rates, indicating bond market fears of an inflation rebound. However, a benign December reading for services CPI (below) triggered a retracement.

CPI & Services CPI

Respect of support at 4.5% will likely signal an advance to test resistance at 5.0% on the 10-year Treasury yield below.

10-Year Treasury Yield

The Dollar Index found support at 109 and is expected to re-test resistance at 110. The strong Dollar increases pressure on foreign central banks to sell off reserves to defend their currencies, driving up yields as foreign selling of Treasuries grows.

Dollar Index

Gold is trending upwards despite rising Treasury yields and the strong Dollar. Breakout above $2,800 per ounce would offer a medium-term target of $3,000.

Spot Gold

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The Long Game

The elephant in the room is US federal debt, which had grown to $35.5 trillion at the end of Q3 in 2024.

Federal Debt

Fiscal deficits are widening, with interest servicing costs recently overtaking defense spending in the budget.

CBO Projected Federal Deficit

Federal debt (red below) is growing faster than GDP (blue), warning that the fiscal position is unsustainable, especially as interest servicing costs widen the gap.

Federal Debt & GDP Growth

The ratio of federal debt to GDP grew to a precarious 113.3 percent at the end of Q3 2024 and is expected to accelerate higher.

Federal Debt to GDP Ratio

Long-term Treasury yields are rising as concerns grow over the unsustainability of debt and deep fiscal deficits fueling long-term inflation.

10-Year Treasury Yield

The strong Dollar further exacerbates the situation, increasing sales of US Treasuries, as mentioned earlier, when foreign central banks free up reserves to protect their currencies. The incoming Republican administration has committed to preserving the Dollar’s status as the global reserve currency. Maintaining reserve currency status is likely to entrench a strong Dollar. A Dollar index breakout above 110 will offer a target of the high at 120 from 2000, as shown on the quarterly chart below.

Dollar Index

As Luke Gromen points out, the Fed can cut interest rates to weaken the Dollar, but that would increase fears of inflation and, in turn, drive up Treasury yields. So, the rise in long-term Treasury yields is almost inevitable.

Gold respected support at $2,600 per ounce, as shown on the monthly chart below. The secular uptrend is fueled by four key concerns. First is the sustainability of US federal debt. Next is fear of rising inflation exacerbated by the on-shoring of critical supply chains and a decline in international trade. Third are geopolitical tensions, fostering rising demand for the safety of gold and an increased desire by non-aligned nations to break free from Dollar hegemony. Last is the collapsing Chinese real estate market, which no longer serves as the primary investment for private savings, leaving gold the most attractive alternative.

Spot Gold

Breakout above $2,800 would offer a long-term target of $3,600 per ounce.

Conclusion

Treasury yields are in a secular uptrend, with the bond bear market expected to last at least a decade. The primary driver is concern over the sustainability of US federal debt, which exceeds 110% of GDP, while deficits threaten to expand. Not far behind are fears of rising long-term inflation, fueled by expanding fiscal deficits while the economy is close to full employment, and increased protectionism driving up costs.

The Dollar is likely to remain strong, with the Index expected to reach 120, as long as the US remains committed to preserving the Dollar’s status as the global reserve currency.

Gold is riding a secular wave, fueled by concerns over the sustainability of US federal debt, fears of long-term inflation, rising geopolitical tensions, and collapse of the domestic real estate market as an attractive investment for private Chinese savings. We expect this to last for decades, perhaps even longer. Our target for gold is $3,600 per ounce by 2028.

The only feasible long-term path to reduce federal debt relative to GDP is for the Fed to suppress interest rates. This would allow GDP fueled by inflation to grow at a faster rate than fiscal debt and gradually reduce the ratio of debt to GDP to sustainable levels. The inevitable negative real interest rates would further boost demand for gold.

Acknowledgments

Inflation fears threaten higher interest rates

Markets are hesitant ahead of December CPI data due for release in a few hours.

Fearful of a resurgence in inflation, Treasury investors are driving up long-term interest rates, with the 10-year yield headed for a test of 5.0%.

10-Year Treasury Yield

Long-term inflation expectations are rising, with the University of Michigan 5-year outlook climbing to 3.3%.

University of Michigan: 5-Year Inflation Expectations

Producer prices are also rebounding, with services PPI recovering to 4.02% in December.

PPI Services

We do not anticipate a significant hike in CPI, but there are warning signs of a rebound.

Brent Crude

Brent crude climbed to $80 per barrel on the threat of new sanctions on Russian shipping impacting supply. Retracement that respects support at $76 would warn of another advance.

Brent Crude

Energy prices are a key vector for inflation. The chart below shows how energy CPI (orange) rose ahead of headline CPI (red) in 2021, and its fall in 2022 – 23 was instrumental in inflation’s subsequent decline.

Energy CPI & Headline CPI

Stocks

Mega-cap technology stocks are dragging the S&P 500 down, with former frontrunner Nvidia (NVDA) falling 7.2% over the past two months. Tesla (TSLA) has also shed almost half its December gains.

Top 7 Technology Stocks

The S&P 500 index is retracing to test resistance at 5850. Respect would warn of a further decline to 5700.

S&P 500

Large caps enjoy more support, with the equal-weighted index ($IQX) respecting key support at 7000.

S&P 500 Equal-Weighted Index

Rising long-term interest rates have set off a migration from high-multiple growth stocks to more defensive value sectors, with the Russell 1000 Large Cap Value ETF (IWD) outperforming the Russell 1000 Large Cap Growth ETF (IWF) in the past few weeks.

Russell 1000 Large Cap Value ETF (IWD) & Russell 1000 Large Cap Growth ETF (IWF)

Financial Markets

Bitcoin struggles to break resistance at $100K as financial market liquidity tightens. A reversal below $90K would warn of a liquidity contraction likely to affect stocks and bonds.

Bitcoin (BTC)

Gold

Fears of persistent inflation drive gold and geopolitical tensions fuel further demand. A higher Trend Index trough indicates rising buying pressure and a breakout above $2,725 per ounce would signal another test of $2,800.

Spot Gold

The monthly chart below shows the long-term view, where breakout above $2,800 would offer a target of $3,600.

Spot Gold

Conclusion

Rising long-term Treasury yields reflect the growing risk of long-term inflation.

The outlook is bearish for growth stocks trading at high earnings multiples and financial instruments with a duration longer than two years.

We remain bullish on gold and defensive stocks.

Acknowledgments

Fed shock – really?

Stocks plunged on indications that the Fed would slow further rate cuts after announcing a 25-basis-point cut at the FOMC press conference on Wednesday.

Really? That could be seen coming for months. The economy has proven resilient, unemployment is low, and retail sales are growing. The obvious question is: “Why cut rates at all?”

FOMC Decision

As expected, Chairman Jerome Powell announced a 25-basis-point rate cut, lowering the fed funds rate target to 4.25% to 4.5%.

Financial markets were spooked by the sharp jump in FOMC projections for rate cuts next year. The Dot Plot now centers on a further 50 basis points of rate cuts in 2025, a target range of 3.75% to 4.0%.

FOMC Dot Plot

Compare that to the September projection below, which was equally divided between 100 and 125 basis points of cuts next year, a range of 3.0% to 3.5%.

FOMC Dot Plot - September

Powell explained that:

  • The economy is “strong” and has made good progress towards the Fed’s goals.
  • The job market has cooled but remains “solid.”
  • Inflation continues to move towards the Fed’s 2% target.

The Fed Chair provided further background in answers to reporters’ questions:

  • “We feel that slowing the pace of future adjustments seems prudent now, especially as we expect inflation to be stickier than we initially thought.”
  • “Some FOMC members did cite future inflationary fiscal policy as a concern.”
  • “Most forecasters keep calling for a slowdown in economic growth, but we haven’t seen it yet and don’t see one happening soon. The US economy is doing great.”
  • “We’re not too worried (about loose financial conditions). Both inflation and labor have cooled, so our policy is working. Financial conditions aren’t impeding us.”

Fed Balance Sheet

Powell announced that QT would continue at the same rate, but the rate offered on reverse repo (RRP) would be lowered, which may encourage further money market outflows into the T-Bill market. Total Fed holdings of Treasuries and mortgage-backed securities (MBS) have fallen by $1.9 trillion since their peak of $8.5 trillion in 2022.

Fed Balance Sheet: Treasuries and Mortgage-Backed Securities (MBS)

Only another $6.0 trillion to go. 😟

Treasury Markets

Ten-year Treasury yields jumped. Breakout above resistance at 4.5% would offer a target of 5.0%, which would be bearish for stocks and precious metals.

10-Year Treasury Yield

Stocks

The S&P 500 plunged to support at 5860. Breach would signal a test of 5700.

S&P 500

Tesla (TSLA) dipped sharply after a spectacular two months, peaking at +117%, compared to Nvidia (NVDA) at -6.6%.

Top 7 Technology Stocks

The weekly chart of the equal-weighted S&P 500 index ($IQX) shows a breach of support at 7150, likely headed for a test of 6900. The lower Trend Index peak identifies selling pressure but is still above zero, indicating that the primary trend remains intact.

S&P 500 Equal-Weighted Index - Weekly

Financial Markets

The Chicago Fed National Financial Conditions Index dipped to -0.66% on December 13, indicating “loose” monetary conditions. Moody’s Baa corporate bond spreads are also at a thirty-year low, reflecting easy credit conditions.

Chicago Fed National Financial Conditions Index & Moody's Baa Corporate Bond Spreads

Bitcoin retraced to test support at $100K, but the strong uptrend still signals abundant financial market liquidity.

Bitcoin (BTC)

Dollar & Gold

The Dollar has strengthened in response to rising Treasury yields, with the Dollar Index breaking resistance at 108.

Dollar Index

The Bank of Japan may be forced to raise interest rates again to support the Yen, which could cause an outflow from US financial markets as carry trades unwind.

Japanese Yen - Weekly

Gold broke support at $2,625 per ounce, signaling a test of primary support at $2,550.

Spot Gold

The long-term uptrend, shown on the weekly chart below, remains intact.

Spot Gold - Weekly

Silver similarly broke support at $30 per ounce, but a breach of primary support at $26.50 remains unlikely.

Spot Silver - Weekly

Conclusion

The Fed is riding a wave of deflationary pressure from the global economy, led by China. The bear market in crude oil and copper signals that global demand is contracting. Low inflation should enable further rate cuts next year, but the pace will likely slow as the Fed is wary of a resurgence in domestic demand.

The prospect of inflationary economic policies from the new administration could set off a public feud between Donald Trump and the Fed chairman. Stimulating an economy that is already close to full employment would force the Fed to hike rates to ease inflationary pressures, attracting the ire of the new president.

US financial markets, with rising long-term Treasury yields, are sucking up global liquidity and more than offsetting Fed tightening (QT). The strong Dollar increases pressure on international borrowers in the Eurodollar market as domestic exchange rates weaken. The Bank of Japan may also be forced to hike interest rates again to support the Yen, causing further unwinding of the carry trade and outflows from US financial markets.

The S&P 500 is overdue for a correction, but the primary uptrend is unlikely to reverse unless there is a sharp contraction in financial market liquidity.

Gold and silver are undergoing a sharp correction, but the primary uptrend remains intact. Two long-term fundamental trends support precious metals. First, central banks are increasing their gold reserves and reducing currency reserves as the global sovereign debt bubble expands. Second, in response to a collapsing domestic real estate market, Chinese investors are switching focus to gold and silver as a store of wealth.

Acknowledgments

The last guardrail

In the above ABC interview, Professor Nouriel Roubini said it would be interesting to watch Trump deal with financial markets:

He said if Trump was “really serious” about 60 per cent tariffs on China, and 10 to 20 per cent tariffs on other trading partners, about sharply weakening the value of the US dollar, about “draconian restrictions” on migration and “mass deportation”, and about tax cuts that weren’t funded by raising other taxes or cutting spending, it could lead to situations Trump wouldn’t like.

“If he tries to follow these policies that are stagflationary, interest rates are going to be much higher, bond yields are going to be higher, the Fed will have to raise rates rather than cutting them, the stock market is going to correct,” he said.

“He cares about the bond market. He cares about the stock market. And therefore market discipline, as opposed to political discipline … [will] be the main constraint [for him].”

Long-term Treasury bonds continued their downtrend after November 5.

iShares 20+Year Treasury Bond ETF

Ten-year yields are testing resistance at 4.5%. A breakout above 4.5% would likely cause a correction in stocks.

10-Year Treasury Yield

Fears of rising inflation are not the only factor driving Treasury yields higher. Since 2020, Treasury issuance has been skewed towards short-dated T-bills, with the issuance of notes and bonds (green) kept as low as possible to suppress long-term yields.

Treasury Issuance

A study by Hudson Bay Capital concluded that rolling back the excess $1 trillion in T-bill issuance would cause a 50 basis point rise in the 10-year yield—equivalent to a 2.0% rise in the Fed funds rate—before settling at a permanent 30 basis point increase.

Also, Fed QE almost exclusively focused on purchasing notes and bonds to keep long-term yields as low as possible. Reducing the Fed’s balance sheet through QT increases the supply of notes and bonds, driving long-term yields higher.

Fed Holdings of Treasury Notes & Bonds and T-bills

Rising long-term yields constrain the S&P 500, which is testing support at 5850. Breach would signal a correction to 5700.

S&P 500

Financial Markets

Bitcoin remains above 90K, signaling strong liquidity in financial markets.

Bitcoin (BTC)

Dollar & Gold

The Dollar index retraced to test support at its rising trendline, but breakout above 107 remains a threat, offering a target of 115.

Dollar Index

Gold rallied off support at $2,550 per ounce. Penetration of the descending trendline at $2,650 would indicate a base forming.

Spot Gold

Silver similarly found support at $30 per ounce.

Spot Silver

Energy

Brent crude remains in a bear market, which is likely to keep inflation in check as long as global demand remains subdued.

Brent Crude

Base Metals

Copper also reflects weak global demand, with another likely test of support at $8,600 per tonne.

Copper

Conclusion

Donald Trump’s election campaign was based on reviving a “weak” economy, which has proved surprisingly resilient. The Fed and Treasury succeeded in taming inflation without crashing the economy—a rare feat. However, their efforts have built up imbalances in the financial system that lie in wait for the unwary.

Stimulating an economy already close to full employment will inevitably cause higher inflation, preceded by a surge in long-term Treasury yields. The result would be a sharp fall in stock prices and a likely recession.

The Republican party may control the House and the Senate, but the final guardrail is the bond market. They ignore that at their peril.

Gold and silver fell as the Dollar soared in response to higher long-term Treasury yields. But yields are rising in anticipation of rising inflation. We remain bullish on gold and retain our $3,000 per ounce target.

Acknowledgments

S&P 500 makes new high

Bond markets were closed Monday for Columbus Day, but financial market conditions show further signs of easing. Equities powered ahead, with the S&P 500 making a new high at 5859.

Stocks

The S&P 500 broke resistance at 5800, strengthening commitment to our target of 6000 by year-end. Rising Trend Index troughs signal long-term buying pressure.

S&P 500

The advance is broad, with the equal-weighted index ($IQX) breaking resistance at its previous high of 7300. This offers a target of 7500.

S&P 500 Equal-Weighted Index

Financial Markets

Moody’s Baa corporate bonds spread narrowed to 1.54%, signaling ready availability in credit markets.

Moody's Baa Corporate Bond Spreads

Bitcoin also broke above its six-month trend channel, signaling strong liquidity in financial markets.

Bitcoin (BTC)

Dollar & Gold

The Dollar Index continues to strengthen as Treasury yields rise. This may seem counterintuitive, given the prospect of further rate cuts ahead, but the strong September jobs report has increased bond market concerns about an inflation recovery.

Dollar Index

Gold found support at $2,600 per ounce but has hesitated at $2,650. A lower Trend Index peak would warn of another test of support at $2,600. The Shanghai Gold Exchange no longer trades at a premium, with the iAu99.99 contract quoted at 605.04 RMB/gram, equivalent to $2,643 per ounce at the current exchange rate of 7.12 CNY to the Dollar.

Spot Gold

Silver is also hesitant, testing short-term support at $31 per ounce.

Spot Silver

Crude Oil

Brent crude is retracing to test support at $76 per barrel after Israel confirmed they would not strike Iranian oil targets and OPEC cut their oil demand forecast for 2024 and 2025.

Brent Crude

Brent [crude] fell 5%, or more than $4, in after-hours trading following a media report that Israeli Prime Minister Benjamin Netanyahu told the U.S. that Israel is willing to strike Iranian military targets and not nuclear or oil ones…..

OPEC on Monday cut its forecast for global oil demand growth in 2024 and also lowered its projection for next year, marking the producer group’s third consecutive downward revision. China, the world’s largest crude oil importer, accounted for the bulk of the 2024 downgrade as OPEC trimmed its growth forecast for the country to 580,000 barrels per day (bpd) from 650,000 bpd. China’s crude imports for the first nine months of the year fell nearly 3% from last year to 10.99 million bpd, data showed. Declining Chinese oil demand caused by the growing adoption of electric vehicles (EV), as well as slowing economic growth following the COVID-19 pandemic, has been a drag on global oil consumption and prices. (Reuters)

Base Metals

Copper is testing short-term support at $9,500 per tonne after it respected resistance at $9,900. Breach of support would offer a target of $9,250.

Copper

Aluminum similarly retreated from resistance at $2,650 per tonne and will likely test support at $2,500.

Aluminum

China’s deflationary pressures also worsened in September, according to official data released on Saturday. A press conference the same day left investors guessing about the overall size of a stimulus package to revive the fortunes of the world’s second-largest economy.

“The lack of a clear timeline and the absence of measures to address structural issues, such as weak consumption and reliance on infrastructure investments, have only increased ambiguity amongst market participants,” noted Mukesh Sahdev, the global head of commodity markets-oil at Rystad Energy. (Reuters)

Iron Ore

Iron ore is expected to retrace to test support at $100 per tonne following a sharp rise after China’s stimulus announcement.

Iron Ore

Conclusion

Financial markets show signs of a promising rise in liquidity, with falling corporate bond spreads and Bitcoin breakout above its six-month trend channel. The S&P 500 responded with breakout above 5800, strengthening our commitment to a target of 6000.

Gold and silver display strong uptrends but hesitate in response to a rising Dollar. Increased fears of an inflation rebound are behind the recent rally in long-term Treasury yields and the Dollar. We expect the uptrend in gold and silver to continue, with low real interest rates, whether or not inflation fears fade.

We expect that China will struggle to recover from its current economic slump. The announced stimulus program remains vague and does not address the underlying issue of weak domestic consumption. Deflationary pressures will likely keep a lid on crude oil and industrial metal prices for several years.

Low crude oil prices are also likely to keep inflation in check, leading to low long-term interest rates in the West.

Acknowledgments