Tag: 10-Year Treasury Yield

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Inflation dips?

The 10-year Treasury yield retreated after the release of December CPI data, with breach of the rising trendline signaling a correction to test support at 4.5%.

10-Year Treasury Yield

However, the monthly chart below shows the long-term uptrend is unchanged, with the 10-year yield expected to reach 5.0%. Breakout above resistance would warn of an advance to 6.0%.

10-Year Treasury Yield

CPI Inflation

Core CPI (ocher) dipped slightly to 3.2% for the twelve months to December, while headline CPI (red) increased to 2.9%, holding stubbornly above the Fed’s 2.0% target.

CPI & Core CPI - Annual

Monthly data shows a sharp spike in headline CPI in December, increasing at an annualized rate of 4.7%. Core CPI, however, slowed to 2.7% (annualized).

CPI & Core CPI - Monthly

Energy

The difference is energy costs, excluded from core CPI, which jumped 2.63% in December, warning of rising energy prices in 2025. The December increase equates to an annualized rate of more than 30%.

CPI Energy

Energy prices are a key vector for transmitting inflation. Prices rise steeply during a boom as expanding demand outstrips inelastic supply, and the opposite occurs during a recession when falling energy demand causes a surplus. Energy prices (orange below) rose ahead of headline CPI (red) in 2021 and fell ahead of its subsequent decline in 2022 – 23.

CPI & CPI Energy - Annual

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Services

CPI for services (excluding shelter) was a low 0.099% in December or 1.2% annualized. Services generally indicate more persistent inflation, so the Fed will likely treat this as a win.

CPI Services excluding Shelter Rents

Long-term Inflation Outlook

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

We do not anticipate a significant hike in CPI in early 2025, but there are warning signs of a rebound.

Brent Crude

Brent crude has climbed to above $80 per barrel on fears that new sanctions on Russian shipping will impact supply. Retracement that respects support at $80 would confirm another advance.

Brent Crude

Stocks

Mega-cap technology stocks rebounded from yesterday’s fall, with the two most volatile Nvidia (NVDA) and Tesla (TSLA) showing gains.

Top 7 Technology Stocks

The S&P 500 index recovered above resistance at 5850, indicating another test of the high at 6100.

S&P 500

Large caps also enjoyed support, with the equal-weighted index ($IQX) testing resistance at 7200. Breakout would indicate another test of 7600.

S&P 500 Equal-Weighted Index

Growth stocks rebounded from their recent sell-off relative to defensive stocks. However, the Russell 1000 Large Cap Value ETF (IWD) has outperformed the Russell 1000 Large Cap Growth ETF (IWF) over the past month.

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

Financial Markets

Bitcoin is again testing resistance at $100K. Reversal below $90K would warn of a liquidity contraction likely to affect stocks and bonds, but there are signs that financial conditions are easing. Breakout above $100K would confirm.

Bitcoin (BTC)

Expanding liquidity is partly attributable to a $350 billion fall in Fed overnight reverse repo operations in January after an equally sharp rise in December caused a contraction.

Fed Overnight Reverse Repo Liabilities

The Chicago Fed National Financial Conditions Index declined to -0.63 on January 10, suggesting similar financial easing to 2021.

Chicago Fed National Financial Conditions Index

Moody’s Baa corporate bond spread has also narrowed to 1.44%, the lowest since the 1990s, which indicates ready credit availability.

Moody's Baa Corporate Bond Spreads

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 resistance at $2,800 (green) would offer a target of $3,600.

Spot Gold

Conclusion

Our three pillars supporting financial markets are 10-year Treasury yields, crude oil prices, and financial market liquidity.

Financial market liquidity is strong and supports demand for stocks and bonds with easy access to leverage.

Crude oil prices have been subdued since 2023, with strong production from non-OPEC+ producers (especially the US) and weak demand from China. However, geopolitical tensions now threaten supply, with Brent crude rising above $80 per barrel. The risk is that higher energy prices cause a resurgence of inflation and drive up long-term interest rates.

Inflation concerns over a tight labor market were temporarily allayed by December’s weak core CPI and services CPI growth. However, rising energy costs will likely increase input costs, causing a rebound in the months ahead. Market concerns over inflation are expected to grow as the incoming administration attempts to stimulate an economy already at close to capacity. The 10-year Treasury yield may briefly retrace to test support but is then likely to continue its long-term uptrend. Breakout above 5.0% would offer a target of 6.0%, which would be bearish for stocks and bonds.

We are underweight growth stocks trading at high earnings multiples and are avoiding financial instruments with a duration longer than two years.

Gold will likely benefit from a higher long-term inflation outlook and rising geopolitical tensions. We are overweight gold and defensive stocks trading at reasonable multiples relative to earnings.

Acknowledgments

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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

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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

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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

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GDP gradually slowing

Real GDP growth slowed slightly to 2.66% over the twelve months ending in Q3, compared to 3.04% for the previous quarter.

Real GDP Growth

Real quarterly growth is essentially unchanged at 0.70% (2.8% annualized) in Q3.

Nominal GDP & Real GDP, Quarterly

Nominal GDP growth (gray below) slowed to 4.94% for the four quarters ending in Q3. Ten-year Treasury yields are lower, indicating that monetary policy remains supportive.

Nominal GDP & 10-Year Treasury Yield

This is borne out by the Chicago Fed National Financial Conditions Index at a low -0.56.

Chicago Fed National Financial Conditions Index

Credit markets also signal strong liquidity, with Moody’s Baa corporate bond spread narrowing to 1.49%.

Moody's Baa Corporate Bond Spreads

Conclusion

Real GDP growth is slowing gradually, as expected during a rate-cut cycle. Financial market liquidity remains strong, and there is nothing particularly concerning.

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China sizzle turns to fizzle

China’s announcement of economic stimulus and hints at an even larger “bazooka” ahead caused a sizzling rally on the Shanghai exchange, with the CSI 300 leaping 20% in the last week of September.

Shanghai Shenzhen CSI 300 Index

Hong Kong’s Hang Seng Index displays an even steeper rally.

Hang Seng Index

However, a failure to follow through this week with sufficient detail of the stimulus package caused the rally to fizzle, with a sharp correction on both indices. Today, the Hang Seng is testing support at 20500.

China Stimulus

Crude Oil

Brent crude reversed sharply as prospects faded for a demand recovery in China.

Brent Crude

Treasury Markets

Ten-year Treasury yields stalled and will likely re-test new support at 4.0%.

10-Year Treasury Yield

According to the theory of interest developed by Swedish economist Knut Wicksell, the equilibrium or natural rate of interest—at which inflationary and deflationary pressures are in balance—is when the cost of borrowing is higher than the average return on new investment. This means that the 10-year Treasury yield–the risk-free rate–should be roughly equal to nominal GDP growth, approximating the return on new investment. The chart below shows that the 10-year Treasury yield, at 4.0%, is significantly lower than nominal GDP growth of 5.7% for the 12 months ended in Q2.

Wicksell Analysis: Nominal GDP Growth & 10-Year Treasury Yield

With the economy showing little sign of slowing, the likely outcome is either higher long-term interest rates or a build-up of long-term inflationary pressure.

Stocks

The S&P 500 gained almost 1.0% on Tuesday, with a shallow retracement and rising Trend Index troughs signaling buying pressure.

S&P 500

Nvidia led the advance of mega-cap stocks, breaking above its August high, while all seven advanced yesterday.

Top 7 Technology Stocks

The equal-weighted index lagged as large caps failed to match mega-cap gains.

S&P 500 Equal-Weighted Index

Financial Markets

Bitcoin continues to test the upper border of its trend channel. A breakout would be a bullish sign for financial market liquidity.

Bitcoin (BTC)

Dollar & Gold

The Dollar Index is expected to retrace to test new support at 102. Respect would confirm an advance to 104.

Dollar Index

Gold is headed for a test of support at $2,600 per ounce, but respect will likely confirm a re-test of $2,700.

Spot Gold

Silver is testing support at $30 per ounce, with respect again likely to signal a re-test of resistance at $32.

Spot Silver

Metals

Copper retreated in response to China’s disappointing stimulus. Expect a correction to test support at $9,250 per tonne.

Copper

Iron ore also reflects disappointment, retreating to $106.30 per tonne.

Iron Ore

Conclusion

A disappointing lack of detail on China’s newly announced stimulus led to a retreat in Chinese stocks and global crude oil, copper, and iron ore.

Ten-year Treasury yields are expected to retrace to test support at 4.0%. While yields are likely to remain low as the Fed cuts interest rates, the long-term equilibrium rate is expected to be higher—between 5% and 6%.

Respect of support at 5650 on the S&P 500 confirms our year-end target of 6000, but the advance is exceedingly narrow and precarious.

Gold is headed testing support at $2,600 per ounce, but respect is likely and would signal a re-test of $2,700.

Acknowledgments

Posted on

Houthis and the blow-back

Stocks retraced to test support on concerns over an escalation of hostilities between Israel and Iran and its potential threat to the flow of crude oil from the Middle East.

Stocks

The S&P 500 retraced to test support at 5670/5700, but rising Trend Index troughs signal buying pressure. Respect of support will likely confirm another advance, with a target of 6000.

S&P 500

The equal-weighted index ($IQX) shows that large caps experienced a similar retracement.

S&P 500 Equal-Weighted Index

Financial Markets

Bitcoin is consolidating in a narrow “descending flag” channel. Marginally lower troughs are typically a bullish sign, reflecting support. Upward breakout from the channel would signal a fresh advance, confirming strong liquidity in financial markets.

Bitcoin (BTC)

Treasury Markets

Increased demand for safety drove 10-year Treasury yields lower, again testing support at 3.7%.

10-Year Treasury Yield

Dollar & Gold

The Dollar strengthened, benefiting from the same flight to safety.

Dollar Index

Gold retraced to test support, but the flight to safety will likely fuel another rally, breaking resistance at $2,700 per ounce.

Spot Gold

Silver found short-term support at $31 per ounce and will likely re-test long-term resistance at $32.

Spot Silver

ISM Manufacturing

The ISM Manufacturing PMI continues to signal contraction, holding steady at 47.2%.

ISM Manufacturing PMI

The New Orders sub-index at 46.1% warns of further slowing ahead.

ISM Manufacturing New Orders

So does the Employment sub-index at 43.9%.

ISM Manufacturing Employment

The Prices sub-index surprised, dropping below 50% for the first time since the beginning of the year, reflecting declining inflationary pressures.

ISM Manufacturing Prices

Labor Market

Job Openings also surprised, increasing to 8.04 million in August. The gap above unemployment indicates continued labor market tightness.

Job Openings

Crude Oil

Brent crude is rallying on fears of an interruption to oil supplies from the Middle East.

Brent Crude

Conclusion

Escalation of hostilities between Israel and Iran is likely to fuel a flight to safety, increasing demand for Treasuries, gold, and silver.

We expect the S&P 500 to retrace to test support at 5670. Crude oil is likely to rally but remain in a bear market unless Iran attempts to interdict shipping in the Straits of Hormuz and the Red Sea through its Houthi proxies in Yemen.

The ISM PMI warns of a slowing manufacturing sector, but there has been no significant decline in cyclical sector employment so far. Job openings also maintain a healthy gap above unemployment, indicating a still-tight labor market. The economy is expected to remain reasonably robust until the new year, when liquidity may tighten as the US Treasury likely reduces T-bill issuance, replacing them with longer-term coupons.

Acknowledgments

Posted on

Nvidia leads the plunge

Stocks plunged after Nvidia (NVDA) fell by 9.5% on reports that the US Department of Justice subpoenaed the chipmaker over complaints that it is violating antitrust laws. (Quartz)

Weak US and China manufacturing activity has also been cited as a cause for market bearishness, but that seems unlikely.

Stocks

Selling in Nvidia [cerise] soon spread to other big-name stocks, with all seven mega-caps closing lower on Tuesday.

Top 7 Technology Stocks

The fall breached short-term support on the S&P 500 at 5550, signaling a correction to test 5400.

S&P 500

The equal-weighted index ($IQX) retraced to test support at 7000. Trend Index troughs above zero indicate longer-term buying pressure. Breach of support would offer a target of 6800, but respect is as likely to confirm our target of 7400.

S&P 500 Equal-Weighted Index

Small caps also weakened, with the Russell 2000 iShares ETF (IWM) breaching support at 215 to indicate another test of long-term support at 200. A Trend Index peak at zero warns of selling pressure.

Russell 2000 Small Cap ETF (IWM)

ISM Manufacturing

The ISM Manufacturing PMI edged up to 47.2% in August. Although the cyclical sector is a relatively small percentage of the overall economy, it has a disproportionate impact during recessions as it sheds a large number of jobs. This is the sixth consecutive month of contraction (below 50), but the uptick indicates the contraction is slowing.

ISM Manufacturing PMI

New Orders are also contracting, indicating further headwinds ahead.

ISM Manufacturing New Orders

Also, the Prices sub-index continues to expand, warning of persistent inflationary pressure.

ISM Manufacturing Prices

However, the bearish outlook for manufacturing is offset by solid growth in other cyclical sectors, with combined employment in manufacturing, construction, and transport & warehousing reaching 27.85 million.

Manufacturing, Construction, and Transport & Warehousing

Non-residential construction spending continues to strengthen even when adjusted for inflation, benefiting from government programs to re-shore critical supply chains.

Non-Residential Construction Spending adjusted for inflation

China Manufacturing Activity

The official National Bureau of Statistics manufacturing PMI for China fell to 49.1 in August, indicating contraction. However, the downturn is contradicted by a rise in the private sector Caixin PMI to 50.4%:

Caixin China Manufacturing PMI & NBS China Manufacturing PMI

Financial Markets

Credit markets still reflect easy financial conditions, with Moody’s Baa corporate bond spread at a low 1.69%. Spreads above 2.5% indicate tight credit.

Moody's Baa Corporate Bond Spreads

However, Bitcoin has respected resistance at $60K [red line], warning of shrinking liquidity.

Bitcoin (BTC)

Treasury Markets

Ten-year Treasury yields are again testing support at 3.8%. Trend Index peaks below zero warn of long-term selling pressure. Breach of support would indicate another attempt at 3.7%.
10-Year Treasury Yield

Low LT yields are bearish for the Dollar and bullish for gold.

Dollar & Gold

The recent rally in the Dollar Index is losing steam. Tuesday’s weak close suggests another test of support between 100 and 101.

Dollar Index

Gold is retracing to test support at $2,475 per ounce. Trend Index troughs high above zero indicate long-term buying pressure. Respect would indicate another advance to test $2,600. Breach is less likely but would warn of a correction.

Spot Gold

Silver is more bearish, and a breach of support at $27.50 per ounce would test the August low at $26.50.

Spot Silver

Energy

Brent crude broke support at $76 per barrel and is headed for a test of long-term support at $73.

Brent Crude

Nymex WTI crude similarly broke support at $72 per barrel, offering a target of $68. We expect the DOE to increase purchases to re-stock the Strategic Petroleum Reserve below $70, providing support for shale drillers whose margins are squeezed at these levels.

Nymex WTI Crude

Uranium

Uranium continues its downtrend, with the Sprott Physical Uranium Trust (SRUUF) headed for another test of support at 17.

Sprott Physical Uranium Trust (SRUUF)
However, we are bullish on the long-term prospects as resistance to the expansion of nuclear energy fades.

EU's New Pro-Nuclear Energy Chief

Base Metals

After its recent rally, copper is testing short-term support at $9,000 per tonne. Breach is likely and would warn of another decline as China’s economy slows.

Copper

Aluminum leads the way, breaking short-term support to warn of another test of the band of long-term support between $2,100 and $2,150 per tonne.

Aluminum

Iron & Steel

Iron ore recovered above $100 per tonne, but respect of the descending trend line would warn of another decline. Reversal below $100 would confirm our target of $80.

 

Iron Ore

Conclusion

Investors are jumpy as mega-cap stocks trade at inflated prices, boosted by passive investment inflows from index ETFs. We expect the S&P 500 to find support at 5400 and maintain our target of 6000 before the end of the year.

One factor that could upset the apple cart is tightening liquidity. However, the Fed and Treasury will likely support liquidity in financial markets, at least until after the November elections. If they withdraw support, then all bets are off.

Falling crude oil prices will likely ease inflationary pressure, while a slowing Chinese economy is expected to add deflationary pressure. Long-term interest rates are expected to remain low, weakening the Dollar. Gold will likely benefit, with another attempt at our target of $2,600 per ounce.

Acknowledgments

Posted on

Another S&P 500 advance likely

Stocks are poised for a breakout, signaling a fresh advance on the S&P 500. All eyes are focused on the September 17-18 FOMC meeting, with an expected rate cut of at least 25 basis points.

Stocks

The S&P 500 is testing resistance at its previous high of 5670, while Trend Index troughs above zero indicate buying pressure. Breakout would offer a target of 6000.

S&P 500

The equal-weighted index ($IQX) has already broken resistance. Retracement respected support at 7000, confirming our target of 7400.

S&P 500 Equal-Weighted Index

The Russell 2000 Small Caps ETF (IWM) lags, with the Trend Index struggling to recover above zero. A breakout above 225 would offer a target of 250.

Russell 2000 Small Cap ETF (IWM)

Financial Markets

Liquidity in financial markets is gradually tightening, which could act as a handbrake on any advances. A contracting Fed balance sheet, net of TGA and reverse repo (RRP) liabilities, shows the effect of regular monthly QT reductions.

Fed Assets net of TGA & Reverse Repo (RRP) Liabilities

Commercial bank reserves are shrinking as a result.

Commercial Bank Reserves at the Fed

Bitcoin struggles to hold above support at $60K, highlighting the effects of tightening liquidity.

Bitcoin (BTC)

Treasury Markets

Ten-year Treasury yields are rallying to test resistance at 4.0%, but long-term buying pressure—signaled by Trend Index peaks below zero—is expected to keep yields low for the next quarter.

10-Year Treasury Yield

Bank of Japan

A wild card that could disrupt the system is BOJ monetary policy. The last rate hike, to 0.25%, caused the Dollar to fall sharply against the Yen and a sell-off in US financial markets as carry trade positions were unwound.

Japanese Yen

Further rate hikes are on the cards, with the next BOJ meeting scheduled in October. Jim Grant from Grant’s Interest Rate Observer:

CPI excluding fresh food in Japan’s capital grew at a 2.4% annual pace in August, data released yesterday show, topping the 2.2% consensus expectation and marking its fourth consecutive sequential increase. That data series typically serves as a leading indicator for broader price pressures in the world’s fourth-largest economy; nationwide CPI data is due on Sept. 19.

Pointing to transitory factors including expiring government subsidies for utility bills and rice shortages, Norinchukin Research Institute chief economist Takeshi Minami predicted to Reuters that “the underlying inflation trend will continue to moderate in coming months.”

However, percolating wage growth – with average pay rising 5.2% this year per data compiled by Japanese Trade Union Confederation, the highest in more than three decades – could bolster the Bank of Japan’s appetite for further tightening following the July 31 rate increase to 0.25% from a 0% to 0.1% range, as BoJ chief Kazuo Ueda suggested to parliament last week.

Considering the acute financial spasm which followed that rate adjustment and accompanying unwind of yen-funded carry trade positions, the prospect of a sequel would presumably be front of mind for Mr. Market. Investors remain confident that such an outcome is in fact far-fetched, with interest rate futures assigning only 9% odds of further tightening at the BoJ’s Oct. 18 meeting.

Some observers aren’t so sure. “My money is on another rate hike in October,” Moody’s senior economist Stefan Angrick told CNBC Friday, further predicting at least one further uptick early next year. Bloomberg economist Taro Kimura likewise anticipates an October shift to 0.5%, writing that Thursday’s data illustrate “a broad upswing in service prices,” and “increases the risk that the BoJ can’t afford to wait to pare stimulus.”

The destabilizing effect of further BOJ rate hikes should not be underestimated.

Inflation

US inflation, on the other hand, remains subdued. Core PCE inflation ticked to 2.6% for the 12 months to July, but the Trimmed Mean PCE rate declined to 2.7%.

PCE, Core PCE & Trimmed Mean PCE

Monthly core PCE and the headline rate for July are more encouraging, with both growing at an annualized rate below 2.0%.

PCE Inflation - Monthly

Dollar & Gold

The Dollar Index remains in a strong downtrend, with Trends Index peaks below zero, warning of long-term selling pressure. We expect the latest rally to encounter resistance at 102.50.

Dollar Index

Gold retraced to $2,500 per ounce, with a likely test of support at $2,475 as long-term Treasury yields rally and the Dollar strengthens. However, the precious metal is in a strong up-trend, and respect of support would confirm our target of $2,600.

Spot Gold

Silver is weaker than gold because of weak industrial demand from China’s solar industry. A breach of its current support level near $29 per ounce would warn of a decline to test long-term support at $26.50.

Spot Silver

Crude Oil

Brent crude continues to build a base between $76 and $82 per barrel. Low crude prices ease inflationary pressures in the global economy and improve the prospect of lower interest rates.

Brent Crude

Base Metals

Copper penetrated its descending trendline, suggesting that a base is forming. A correction that respects support at $8,600 per tonne would strengthen the signal.

Copper

Aluminum rallied strongly, indicating improving industrial demand. A breakout above $2,500 per tonne would be a bullish sign for copper.

Aluminum

Conclusion

Financial markets warn of gradual tightening, but low long-term interest rates, subdued inflation, and the prospect of a Fed rate cut at the FOMC meeting on September 17-18 are all bullish for stocks. We expect the S&P 500 to break through resistance at its previous high of 5670, confirming our target of 6000.

However, investors need to be aware of the risks ahead in 2025.

After the November elections, Treasury is expected to shift its quarterly funding towards longer-term coupons to take advantage of lower yields. The resulting increase in supply could drive up long-term yields while reducing liquidity in financial markets. On the other side of the Pacific, further rate rises by the Bank of Japan could spark a sell-off in US financial markets as more Yen-financed carry trades are unwound.

Either of the above actions could contract liquidity in financial markets, causing another stock sell-off.

We remain bullish on gold as long as long-term interest rates remain low, weakening the Dollar. Silver is likely to underperform due to weak industrial demand.

Acknowledgments

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Short, medium and long-term outlook

We conclude with a summary of our short-, medium-, and long-term outlook. But first, let’s examine today’s market activity.

Stocks

The S&P 500 is edging higher, gaining 0.3% yesterday, while the strengthening Trend Index indicates that more buyers are returning to the market.

S&P 500The advance is also broadening, with the S&P 500 equal-weighed index ($IQX) testing resistance at the recent high of 7000. Breakout would offer a target of 7400.

S&P 500 Equal-Weighted Index

Financial Markets

The Chicago Fed National Financial Conditions Index declined to -0.52 on August 16, signaling that monetary conditions are again easing.

Chicago Fed National Financial Conditions Index

However, Bitcoin continues to consolidate around $60K, warning that financial market conditions are still unsettled.

Bitcoin (BTC)

Treasury Markets

Ten-year Treasury yields are headed for a test of support at 3.7% while declining Trend Index peaks below zero warn of growing long-term buying pressure, driving down yields.

10-Year Treasury Yield

Expectations of Fed rate cuts are driving yields lower and weakening the Dollar, which is bullish for gold.

Dollar & Gold

The Dollar Index is testing the band of long-term support between 100 and 101. Declining Trend Index peaks below zero warn of growing long-term selling pressure. A breach of 100 would signal a bear market, with a long-term target of 94.

Dollar Index

Gold is retracing to test support between $2,475 and $2,500 per ounce. Rising Trend Index troughs above zero indicate growing long-term buying pressure. Respect of support is likely to confirm our target of $2,600.

Spot Gold

Silver is expected to test support at $29 per ounce. Respect is likely and would confirm our target of $31.50.

Spot Silver

Crude Oil

Brent crude is testing support between $76 and $77 per barrel. A breach would offer a target of $72 to $73 per barrel, the lows from 2023.

Brent Crude

Conclusion

Our short-, medium-, and long-term outlook:

Short-term

Easy monetary conditions will likely continue until after the November election, with a September Fed rate cut of 0.25% almost certain. The S&P 500 is expected to test resistance at its recent high of 5670. Breakout is likely to offer a target of 6000.

Falling interest rates and a weakening Dollar are expected to boost demand for gold and silver, with short-term targets of $2,600 and $31.50 per ounce, respectively.

Medium-term

Our 2025 outlook is for weak industrial demand from China and increased push-back against their dumping of excess production in international markets. Resulting low crude oil and base metal prices are expected to ease global inflationary pressures. Central banks are likely to reduce interest rates to cushion the impact of a contraction in economic activity.

Low long-term yields and a Dollar bear market are expected to be bullish for gold and silver. We expect the S&P 500 to peak at 6000, with stocks growing increasingly bearish as earnings contract and activity declines despite low interest rates.

Long-term

China is expected to suffer from a decade of low growth as it struggles to deal with excessive debt levels and overinvestment in real estate, infrastructure, and industrial capacity. The US and most developed nations also struggle with high debt levels and will endeavor to keep real interest rates near zero. High asset inflation will likely result, causing strong demand for precious metals, real estate, and stocks.

Acknowledgments

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