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The coming week will feature several key economic data releases. The schedule begins on Monday with the ISM Manufacturing report, followed by the JOLTS report on Tuesday, ADP and ISM Services on Wednesday, an ECB meeting on Thursday, and the jobs report on Friday. Additionally, intermittent trade news could also impact the markets.
Current expectations indicate a relatively healthy economic outlook. The ISM reports are anticipated to show a slight improvement in business activity for May, while the jobs report is expected to reflect a continuation of the status quo. This scenario would likely mean that Fed interest rate cuts may be delayed further, potentially disappointing those who wish them sooner rather than later.
Currently, the market is pricing in only about two rate cuts in 2025. This number could easily decrease to one if this week’s data aligns with or slightly exceeds expectations.
The overall data seems to suggest that the current policy rate is not far from the appropriate terminal rate; in fact, policy might be precisely where it needs to be. Barring a recession, the Federal Reserve’s easing cycle appears to be either complete or nearly complete. It’s difficult to foresee a scenario right now that would compel the Fed to cut rates significantly further.
This outlook would argue for higher rates on the long end of the curve than are presently observed, leading to a much steeper yield curve. Currently, the spread between the 10-year Treasury rate and the Federal Funds rate seems too narrow to adequately compensate for the duration risk associated with owning a 10-year bond. If it becomes clear that the front end of the curve (short-term rates) has limited room to fall from current levels, this will likely continue to exert upward pressure on the 10-year rate.
This is arguably the most underappreciated risk for the stock market currently: the possibility that long-end rates have further to climb, given the shallower expected path forward for monetary policy. Therefore, at least in the near term, this likely means the 10-year yield could rise to around 4.8%. This would also suggest a 30-year rate that goes to new cycle highs, well above 5.15%.
Additionally, we need to monitor credit spreads more closely. We are beginning to see signs that they may not return to the tight levels observed in 2024. The 10-year euro swap spread, which has often served as a leading indicator for overall credit spreads, is now on the cusp of turning positive again. This would align with its historical positioning, as it has traditionally been positive.
This could be particularly important for high-yield credit spreads, even in the US, as different types of credit spreads often exhibit correlated movements over time.
This scenario could also lead to tighter liquidity and higher dollar funding costs, potentially indicated by the 5-year USD/JPY Cross-Currency Basis Swap (CCBS) spread. If this spread, when inverted as you noted it appears in the chart you’re viewing, is widening, it would typically illustrate such tightening dollar funding conditions.”
In the meantime, complacency seems to be the prevailing sentiment in the stock market. There are at least three identifiable patterns in the S&P 500 futures that could argue for an upcoming turning point: a diamond pattern, a rising wedge, and a potential double top. Each of these would require confirmation that a bearish trend has started. For that confirmation, we would need to see the S&P 500 futures fall below 5,770.
Anyway, that will be all for Sunday. More Monday afternoon…
-Mike
TERMS BY GEMINI
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ISM Manufacturing/Services Report:
- Definition: These are monthly economic indicators released by the Institute for Supply Management (ISM). The Manufacturing Report (also known as the PMI – Purchasing Managers’ Index) and the Services Report (also known as the Services PMI or Non-Manufacturing Index) survey purchasing and supply executives to gauge business activity, new orders, employment, and other economic trends within their respective sectors. They are considered key indicators of economic health.
- “The schedule begins on Monday with the ISM Manufacturing report… ADP and ISM Services on Wednesday.”
-
JOLTS Report:
- Definition: Stands for Job Openings and Labor Turnover Survey. It’s a monthly report from the U.S. Bureau of Labor Statistics that measures job vacancies, hires, and separations. It provides a more detailed picture of labor market dynamics beyond the headline unemployment rate.
- “…the JOLTS report on Tuesday…”
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ADP (Report):
- Definition: Refers to the ADP National Employment Report, a monthly measure of non-farm private sector employment in the U.S., based on payroll data from ADP, a large payroll processing company. It’s released a couple of days before the official government jobs report and is often seen as a preview, though its accuracy can vary.
- “…ADP and ISM Services on Wednesday…”
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Terminal Rate:
- Definition: The peak interest rate that a central bank (like the Federal Reserve) is expected to reach during a monetary policy tightening cycle. It’s the rate at which the central bank believes policy is sufficiently restrictive to achieve its inflation and employment goals.
- “…the current policy rate is not far from the appropriate terminal rate…”
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Easing Cycle (Federal Reserve’s):
- Definition: A period during which a central bank, like the Federal Reserve, is actively trying to stimulate the economy, typically by lowering interest rates and/or implementing other measures like quantitative easing (asset purchases).
- “…the Federal Reserve’s easing cycle appears to be either complete or nearly complete.”
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Long End of the Curve / Steeper Yield Curve / Front End of the Curve:
- Definition: These terms refer to the shape and segments of the yield curve, which plots interest rates of bonds having equal credit quality but differing maturity dates.
- Long End: Refers to bonds with longer maturities (e.g., 10-year, 30-year bonds).
- Front End: Refers to bonds with shorter maturities (e.g., 3-month, 2-year bonds).
- Steeper Yield Curve: A situation where long-term interest rates are significantly higher than short-term interest rates. This can indicate expectations of rising inflation or stronger economic growth.
- “…higher rates on the long end of the curve… leading to a much steeper yield curve… If it becomes clear that the front end of the curve… doesn’t have very much to fall…”
- Definition: These terms refer to the shape and segments of the yield curve, which plots interest rates of bonds having equal credit quality but differing maturity dates.
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Duration Risk:
- Definition: A measure of how much a bond’s price is likely to change in response to a change in interest rates. Longer-duration bonds are more sensitive to interest rate movements.
- “…too narrow to adequately compensate for the duration risk associated with owning a 10-year bond.”
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Credit Spreads:
- Definition: The difference in yield between bonds of similar maturity but different credit quality, such as between a corporate bond and a benchmark government bond. Wider spreads generally indicate higher perceived risk in the corporate sector or increased risk aversion. “Tight levels” mean these spreads are narrow.
- “…monitor credit spreads more closely… may not return to those tight levels observed in 2024.”
-
10-year Euro Swap Spread:
- Definition: The difference between the fixed rate on a 10-year euro interest rate swap and the yield on a benchmark 10-year government bond (often the German Bund). It can reflect bank credit risk, market liquidity, and hedging demand in the Eurozone.
- “…The 10-year euro swap spread, which has often served as a leading indicator…”
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High-Yield Credit Spreads:
- Definition: The difference in yield between high-yield corporate bonds (also known as “junk bonds,” which have a higher risk of default) and comparable maturity benchmark government bonds.
- “This could be particularly important for high-yield credit spreads…”
-
5-year USD/JPY Cross-Currency Basis Swap (CCBS) Spread:
- Definition: This spread reflects the cost for entities (typically Japanese) to borrow US dollars by swapping Japanese yen for a 5-year term, relative to what it would cost to borrow dollars directly. A more negative (or a widening inverted positive) spread usually indicates higher demand for USD funding or tighter USD liquidity conditions.
- “…potentially indicated by the 5-year USD/JPY Cross-Currency Basis Swap (CCBS) spread.”
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S&P 500 Futures:
- Definition: Financial contracts obligating the buyer to purchase, or the seller to sell, the S&P 500 stock market index at a predetermined price at a specified time in the future. They are used for hedging and speculation on the direction of the S&P 500.
- “…patterns in the S&P 500 futures that could argue for an upcoming turning point…”
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Diamond Pattern / Rising Wedge / Double Top (Technical Analysis Patterns):
- Definition: These are specific formations identified by technical analysts on price charts (like for S&P 500 futures) that are believed to predict future price movements.
- Diamond Pattern (often Diamond Top): A reversal pattern that can signal the end of an uptrend.
- Rising Wedge: Typically a bearish pattern where price action narrows between two upward-sloping but converging trendlines. A break below the lower line often signals a price decline.
- Double Top: A bearish reversal pattern where the price reaches a high, pulls back, and then rallies to a similar high again before declining, suggesting resistance at that level.
- “…a diamond pattern, a rising wedge, and a potential double top.”
- Definition: These are specific formations identified by technical analysts on price charts (like for S&P 500 futures) that are believed to predict future price movements.
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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.
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