stock market inflation rates yield

What The Currency Markets Know About Rising Rates, Stocks Are Missing

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What The Currency Markets Know About Rising Rates, Stocks Are Missing

The stock market has now rallied for four straight days, and it seems to be wasting no time getting itself back in gear. Further, the dreaded inflation reading, cpi, came out today, and it was “hotter” than expected, but fear not, equities did not care. The next test will come tomorrow when the producer price index is released, where expectations are for a m/m rise of 0.4 percent.


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A Rise To 2,713

I mentioned over the past couple of days, the S&P 500 was tracking towards 2,690, and we managed to close today at 2,698, and the next resistance level shall come at 2,713.

stock market S&P 500

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Rates Rise To 3%

Is there any doubt at this point, where the 10-year is going? 3 percent seems more and more likely every day, and with rates now at 2.9 percent, it seems it could come any day now.

interest rates yields

The Message For Stocks

But the dollar is sending a fascinating message, with the dollar vs. yen falling below 107 today, and that is a big deal, because the dollar is now weakening significantly, and that could cause the yen to continue to strengthen, perhaps to a 100.

Meanwhile, the Euro is also strengthening vs. the dollar and could be headed to 1.30.

It is sending a compelling message about what the currency market thinks about our interest rate situation. It tells us that despite, the rising rates in the US, the market is expecting that rates globally will rise at an even a faster pace aboard. In fact, a member of the Bank of Japan has spoken about raising rates or slowing the purchase of ETF’s, that is right ETF’s.

One would surely think that if runaway interest rates were fast approaching or inflation, the dollar would be strengthing, as it would prompt the Fed to tighten rates more aggressively. Rising inflation could erode the buying power of the dollar if rates where left alone, but when was the last time the Fed didn’t tighten rates when inflation was rising.

In fact, part of the reason why the dollar had strengthened so significantly in past 2 years is that the ECB and BOJ were embarking on NIRP (negative interest rate policy) and QE, in fact, Japan got so aggressive it started buying ETF’s. It was an attempt to devalue the currency, to spark inflation, it shall work in reverse should they embark on a tightening policy. The market is apparently telling us they are more worry about interest rates rising globally than the US.

Inflation Not A Concern

Why should the equity market care about this? Well if rates are still basically negative with QE still in place in Europe and Japan, and the dollar is weakening merely at that thought of raising rates in those two part of the world, then the inflation picture in the US can’t be that serious yet, and the stock market will realize that at some point.

But like I have said before, the equity market isn’t the sharpest tool in the shed when it comes to this type of stuff.

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