Tuesday Rates & the US Dollar
As mentioned last week, a look back at ten years of the yield curve indicates that the level of rates, as well as the slope and the duration of the curve, are not yet as restrictive as the last peak in late 2000. At this point, the inverted curve does not appear to be negatively impacting the stock market. In fact, the current level of long rates may be helping to support stock market prices, along with the prospect of lower short-term rates.
However, an inverted yield curve is a very important signal for all markets, and particularly the equities markets. The inversion traditionally signals a likely economic slowdown, and the first signs of the slowdown are already being reported.
With three large economies having inverted yield curves ( USA, UK and Australia) it seems likely that a slowing of economic growth will take place not only in the USA, but worldwide. For this reason, the impact of bonds and rates on the equities markets indicates the need for investor caution.
US Treasury 2-year, 5-year, 10-year and 30-year rates have all dipped below, and have held under, their 39-week moving averages (MA). This recent weakness in rates no doubt reflects recent weakness in economic growth.
The 10-year rate is particularly important to watch at this point because it is near an upward sloping support line that was touched and confirmed several times over the past four years. A break below would be an added signal of lower rates ahead.
As mentioned in yesterdays’ report, the US Dollar failed at important long-term horizontal, trend line and moving average resistance. Moving above this confluence of resistance would be an important signal, but for now the dollar weakness confirms the trend lower in rates and supports the view of Fed easing early next year.
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