Tag: 10-Year Treasury Yield

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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 CNBC:  Is 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

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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

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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

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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

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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.

 

 

 

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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

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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.

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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

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Threat of a US-China trade war boosts gold

Donald Trump’s reversal on tariffs on Canadian and Mexican imports caused a sharp rebound in the S&P 500. However, tariffs on Chinese imports remain in place and have elicited a response from the Middle Kingdom.

Stocks

The S&P 500 retraced to test resistance at 6000. Respect would confirm a correction.

S&P 500

Six of seven mega-cap technology stocks showed losses, with only Meta Platforms (META) recording an up-day.

Top 7 Technology Stocks

Financial Markets

Financial market conditions remain stimulative, with Moody’s Baa corporate bond spread narrowing to 1.45%, the lowest level since 1997. This indicates the ready availability of credit.

Moody's Baa Corporate Bond Spreads

Treasury Markets

Ten-year Treasury yields continue to test support at 4.5%. Respect will likely confirm an advance to test resistance at 5.0%.

10-Year Treasury Yield

US Economy

ISM Manufacturing PMI improved to 50.9%, the highest level in 27 months, indicating a recovery in the sector.

ISM Manufacturing PMI

New orders jumped to 55.1%, indicating expansion.

ISM Manufacturing New Orders

However, the Prices sub-index also increased, indicating inflationary pressures.

ISM Manufacturing Prices

Leading industry sectors also warn of a slowing economy. Airfreight and logistics (blue) plunged by more than 10% and would flag a recession ahead if joined by a decline in either containers and packaging (orange) or road and rail (green).

Leading Industry Sectors

China Tariffs

China has slapped tariffs on US imports in a swift response to Donald Trump’s duties on Chinese goods, renewing a trade war between the world’s top two economies as America’s President seeks to punish Beijing for not halting the flow of illicit drugs.

Mr Trump’s additional 10% tariff across all Chinese imports into the US came into effect at 12.01am Eastern Time on Tuesday (5.01am GMT).

Within minutes, China’s Finance Ministry said it would impose levies of 15% for US coal and Liquid Natural Gas and 10% for crude oil, farm equipment and some cars and trucks. The new tariffs on US exports will start on February 10, the ministry said.

China also said it was starting an anti-monopoly investigation in Alphabet Inc’s Google, while including both PVH Corp, the holding company for brands including Calvin Klein, and US biotechnology company Illumina on its “unreliable entities list”.

Separately, China’s Commerce Ministry and its Customs Administration said it is imposing export controls on tungsten, tellurium, ruthenium, molybdenum and ruthenium-related items to “safeguard national security interests”. China controls much of the world’s supply of such rare earths that are critical for the clean energy transition. (Evening Standard)

Dollar & Gold

The Dollar Index retreated from resistance at 110, but respect of support at 108 will likely confirm another test of 110. The threat of increased tariffs is expected to strengthen the Dollar and increase upward pressure on long-term interest rates as foreign central banks sell reserves to support their currencies.

Dollar Index

Gold broke resistance to set a new high at $2,816 per ounce. Expect retracement to test the new support level at $2,800, but respect will likely confirm our target of $3,000.

Spot Gold

Conclusion

Canada and Mexico are a sideshow, with China likely to be the primary target of US sanctions imposed by the Trump administration. China’s swift retaliation is expected to lead to escalation.

China is in a far weaker position because of its large trade surplus with the US. A trade war is expected to hurt Chinese manufacturing and raw material imports. However, the US will also likely suffer an economic slowdown as global trade shrinks.

We expect the Dollar to strengthen, driving up long-term Treasury yields, which would be bearish for stocks and bonds.

We also expect a trade war to boost demand for gold as central banks reduce their exposure to US Treasuries.

Acknowledgments

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Fed takes a pause

Fed Chair Jerome Powell announced that the FOMC has left the fed funds target range unchanged at 4.25% to 4.5%.

Powell described the labor market as “pretty stable and broadly in balance,” with a low hiring rate and an equally low quit rate.

Quit Rate

The key question for investors in the post-announcement news conference. Axios: “Was there any discussion on the timeline for ending the QT program?”
Powell responded that their indicators suggest that reserves are still abundant, and the Fed would continue with QT until that changes.

Commercial bank reserves at the Fed reached $3.33 trillion on January 22.

Commercial Bank Reserves at the Fed

However, the decline in bank reserves is expected to accelerate as the rundown in overnight reverse repo (RRP) liabilities nears an end. The reduction in RRP caused money market funds to invest more than $2 trillion in T-Bills over the past two years, effectively offsetting the withdrawal of liquidity via QT.

Fed Reverse Repo (RRP) Liabilities

Financial market conditions currently signal abundant liquidity, with the Chicago Fed Index falling to -0.65. However, that could reverse as the Fed persists with its rundown of securities on its balance sheet.

Chicago Fed National Financial Conditions Index

We will continue with weekly charts for the present as they help to keep daily volatility in perspective.

The 10-year Treasury yield (TNX) below has found support at 4.5%, and respect would signal an advance to 5.0%.

10-Year Treasury Yield

The S&P 500 is testing resistance at 6100. Selling pressure is secondary, and breakout will likely offer a target of 6400.

S&P 500

Dollar & Gold

The Dollar Index (DXY) found short-term support at 107. Recovery above 108 would indicate another test of 110. Broad imposition of tariffs would likely signal the continuation of the long-term uptrend.

Dollar Index

Gold is testing resistance at $2,800 per ounce after a bullish shallow correction. Breakout would offer a target of $3,000.

Spot Gold

Silver remains bearish, testing support at $30, with the trend direction uncertain until a breakout above $32.

Spot Silver

Conclusion

The Fed is likely to keep rate cuts to a minimum for as long as the labor market remains “in balance.”

Liquidity is likely to have a greater impact on financial markets, with an expected contraction in 2025, which is bearish for stocks and bonds.

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