Are Rates Ready To Drop?


From the Desk of Ian Culley @IanCulley

So far, the dollar-yen is playing its part with a little help from Tokyo.

Falling dollar, falling rates, falling dollar-yen…

That’s the mantra reverberating throughout the market. 

But will interest rates get on board?

Check out the US 10-year yield climbing within a four-month channel: 

The 10-year is reacting to the channel’s upper boundary after stalling 25 basis points short of its October 2023 peak. 

Those former highs and rising trading range mark a logical area to witness a near-term pullback.

Plus, interest rates are trending within a broader corrective wave, and momentum is posting a bearish divergence – two data points suggesting lower yields in the coming weeks.

But can we expect a more pronounced pullback that could last months?  

While the most recent momentum divergence is undoubtedly tight, a similar pattern exists between the US Dollar Index $DXY and rates:

DXY peaked in early October, preceding the benchmark rate by approximately two weeks. The same pattern unfolded last month, with DXY ticking the top on the 16th and the 10-year on the 25th.

I might be splitting hairs here – but the pattern exists.

I can see the DXY and the 10-year yield following the same path as they did late last year, steering the markets into Q3.

If so, a weaker dollar and declining yields would produce a tailwind for the technology sector, consumer discretionary stocks, and the broader averages.

We all know US equities could use a boost heading into the summer doldrums – not to mention the relentless bond market crash.

What do you think?

Will rates finally take a breather?

Or will the 10-year digest 5.25% before a substantial pullback? 

–Ian


Countdown to FOMC

The market is kicking the probability of the first 25-basis-point rate cut further down the road to the November meeting.

Here are the target rate probabilities based on fed funds futures:

 

Click the table to enlarge the view.

This data is from the CME FedWatch Tool as of May 2, 2024.

Thanks for reading.

Let us know what you think.

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