The opinions expressed below are my own and do not necessarily represent those of Visdom Investment Group, LLC.
Yield pressure
S&P 500 futures climbed in the premarket, helped by some stories of potential 10-day cease fire between the US and Iran. Treasury yields were higher before and after those headlines. Over the course of the day, stocks opened up but faded quietly. Yields stayed higher across the curve. Crude oil was surprisingly quiet in light of the Mid East headlines and the front end did climb a little. Overall, it was a quiet day for markets with the notable outcome being the higher yields in Treasuries. Capital flow was light again, printing 77% today.
US yields curve remain quite elevated. We are just below 52-week highs in yields almost the entire curve. From 1 year out to 30 years, yields are just below the highs. Only the 3 month yield is materially below its 52-week high.
This higher-rate environment is likely due to the bond market’s worry about inflation. Fed hawkishness since the arrival of Warsh is certainly a factor too.
While equity markets appear to be happy with recent CPI and PPI prints, the bond market is less convinced. If rates remain high, or go higher, even the dip-buyers and permabulls will not be able to push the S&P to new highs.
The approaching earnings wave may help equity bulls get out from under the influence of the yield curve, but that might only work if rates top out here. If they keep climbing, even great earnings reports and guidance will only go so far.
The current range-based trading that appears to be at work for the S&P might be more connected to the yield curve than the chart-watchers think.
I’m not sure what it will take for Treasury yields to fall meaningfully, but I believe that yields have to drop convincingly before stocks really zoom upward.
See you tomorrow.
-Mike
Visdom Market Commentary
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