Tuesday Interest Rates & the US Dollar
All charts and comments intended for education and discussion purposes only. No investment recommendations are being offered. Comments below related to this post are encouraged. | MON - Sector Strength | TUE - Interest Rates | WED - Market Breadth | THU - Commodities & Currencies | FRI - Market Sentiment | SAT - Bullish Percents | About | contact: HeadlineCharts@gmail.com |
Short and long-term interest rates continue to be stable and therefore supportive of equities. The US Dollar has been steadily sinking and will at some point create inflation pressures, but for now the weak US Dollar doesn't seem to be harming the equity market.
Tuesday's are devoted to looking at rates and the US Dollar to see if they are working for or against equities. Below is my favorite yield-curve chart that shows all four major durations at or below the 40-week moving average. In years past, when the yields rolled over like this late in a bull market it was a sign of significant economic weakness as institutional investors rotated out of stocks and into bonds. I'm not saying that won't happen, but I there hasn't been much evidence yet to support that view. It looks to me as though all durations have stabilized and moved sideways for quite some time, and these stable rates have been favorable towards the stock market.
Below is a picture of short-term 3-month T-bill rates, along with the US Dollar, Gold and Equities to show their relationship. It looks as though the peak in short-term rates coincided with a low in equities, weakness in the US Dollar and strength in Gold. Short-term rates are now in a trading range that appears to continue to be favorable to equities and Gold, but is not helping the US Dollar one bit.
Two words come to mind when I look at the chart below, "Yikes" and "Gulp". This chart is a 25-year monthly chart of the US Dollar Index. The optimist would look at this chart and see a US Dollar opportunity since it found very important support near to current low levels in the past. The pessimist will probably see what I see which is a lot of US Dollar weakness and the worrisome implications of inflation and foreigners buying up US assets.
The chart below is a measure of confidence and health in the credit market. If the Dollar weakness, economic slowing, sub-prime worries or any other issue were really impacting the market, I think we'd see the Treasuries begin to outperform the corporates. That hasn't happened but let's keep an eye on this and any other signs of serious weakness underneath the market.
Ditto the above regarding the Financials sector. The subprime scare is not yet behind us, but it is nice to see this index springing back to life. That huge high-volume sell off sure was scary (is scary), but as long as this index remains within this upward channel, or at least maintains important support levels, its another indication that the economy and markets are okay.
