Get 40% Off
🚀 AI-picked stocks soar in May. PRFT is +55%—in just 16 days! Don’t miss June’s top picks.Unlock full list

Rates Wake Up to the Possibility That Fed Cuts May Not Come This Year

Published 14/03/2024, 07:33

Stocks finished mostly lower on the day, with the S&P 500 dropping 19 bps and the NASDAQ 100 falling by 83 bps.

Today, we get PPI and Retail sales, and based on the VIX 1-Day, the market doesn’t seem as concerned, with the implied volatility gauge closing at 11.9 and well below the 19 levels seen ahead of the CPI print.

So, it seems unlikely that we see a volatility crush today.

VIX-1-Hour Chart

In the meantime, one-year inflation swaps closed yesterday at their highest levels since October 2023 (white line), and one-year breakevens (blue line) closed at their highest since the summer of 2022.US Inflation Swap

But yesterday was a big day for things like gasoline, which broke out and surged 3% above resistance and probably has room to run to around $2.70.Gasoline Futures-Daily Chart

It was a big day for copper which rose almost 3.5% and appears to have broken out.Copper Futures-Daily Chart

It is no wonder why inflation expectations are surging. The things that have helped suppress and tell the disinflationary tale are now coming back to life.

When you look at the CPI index, the only thing that is accounting for inflation is core services. Food, energy, and core goods are all non-existent.

But suddenly, this can start to look much different if oil, copper, and gasoline breaks and starts to pick up steam. I haven’t mentioned the shipping rate surge seen since the start of the year.

CPI Index


Why shouldn’t risk assets be rising? Financial conditions, as measured by the Chicago Fed, are in the same spot as they were in February 2022, before the Fed Funds rate was 535 bps lower, and the balance sheet was more than $1 trillion larger.

National Financial Conditions Index

At the end of the day, stocks are risk assets, and you know what: copper, gasoline, and oil are risk assets.

So why should stocks go higher and other risk assets not go higher? This is the same reason that gold is going higher. They are saying the same thing: financial conditions are too easy, and inflation is now at risk of coming back.

The only good news is that rates are slowly waking up to the idea that rate cuts may not manifest this year as this inflation risk is starting to build.

Yesterday, we had 10-year rates move back above the 4.19% level, which potentially opens the door for a rise back to the 4.35% region if the data today is supportive. US 10-Year Bond Yield - Daily Chart

That’s it.

Original Post

Latest comments

Loading next article…
Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.