Rates, The Dollar, and Inflation May Be Poised For A Big Move Higher

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The S&P 500 fell today by about 50 basis points, with the NASDAQ down roughly 65 basis points. PPI came in slightly hotter on the headline numbers, but as I reviewed with members earlier, if you strip out the components that feed into the PCE report, nearly all of those metrics were lower than last month. This has led some analysts to believe that core PCE may not be as strong as previously anticipated, which helped push yields slightly lower to start the day.

This morning, The ECB rate decision caused rates in Europe to fall, as the statement was interpreted as dovish. However, following the press conference, rates in Europe rose sharply. Notably, the Italian-German 10-year spread increased by about seven basis points to 1.13%. This move may have received little attention, but it is significant. Spreads tend to move in tandem, and the Italian-German spread reaching levels last seen in late 2021 or early 2022 is noteworthy. Today’s considerable increase could signal the beginning of a bottoming process in credit spreads.

European rates closed higher, with Italian 10-year yields rising by 14 basis points and German 10-year yields by seven basis points. U.S. 10-year yields also rose following a weaker-than-expected 30-year auction, ending the day at around 4.33% to 4.34%. This level is essential, as the 10-year yield closed just above a key trendline and horizontal support at 4.34%, suggesting a potential breakout toward 4.75%. Over the long term, nominal 10-year yields could trend as high as 6%.

We’ll get import-export price data tomorrow, with retail sales coming Tuesday and the FOMC meeting on Wednesday. The Fed is expected to announce a rate cut, but the dot plot may lean more hawkish, potentially pushing rates higher.

U.S. two-year inflation swaps rose by one basis point to 2.61% today. While still below 2.7%, a sustained rise above that level could shift market expectations toward potential rate hikes in 2025 rather than cuts. Two-year inflation swaps have historically been a leading indicator of Fed policy direction.

The U.S. dollar strengthened by 34 basis points today, with key resistance on the dollar index at 107.25. A breakout above this level could push the dollar index back toward 109, a significant move, as the dollar has not been above 107.25 since late 2022.

In equities, the S&P 500 declined by 54 basis points, with market breadth showing continued weakness. The relative strength index (RSI) is trending downward, and the advance-decline line is falling, suggesting liquidity strains are beginning to appear in equity markets. Support for the S&P 500 lies around 6,000, with additional support at 5,860 to 5,690. Resistance may be near the upper Bollinger Band at approximately 6,150.

I will be back on Sunday.

Mike

Charts used with the permission of Bloomberg Finance L.P. This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.

This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.