Rising Rates Are the Market’s Golden Thread

From the Desk of Ian Culley @IanCulley

Stocks and bonds look vulnerable right now. 

US T-bonds are sliding to fresh decade lows. The S&P 500 completed a three-month top last week.  And the Nasdaq 100 is on the verge of doing the same. 

Those summer highs are receding into the collective memory bank, replaced by new lows and growing unease. Sellers are out in full force.

But instead of allowing the near-term selling pressure and overall choppy conditions to throw us off balance, let’s focus on the one underlying trend tying this market together…

Rising interest rates!

Check out the commodity-bond ratio overlaid with US 30-year yield $TYX:

I presented this chart yesterday during the Chart Summit – no markups needed.

For whatever reason, I’ve never shared this chart before. Perhaps I thought it was too obvious. Everybody knows commodities outperform bonds during a rising-rate environment. Right?

As I flipped through the deck, I noticed at least one 30-year yield overlaid chart in each section (the US dollar index $DXY, the Energy $XLE versus Tech $XLK, and the 10-year with the crude oil-to-gold ratio).

Then, it hit me. 

Rising interest rates are the market’s “golden thread.” They’re the key theme tying the major asset classes together, pulling price and all of us along with it.

We can use this understanding to approach the markets with clarity and purpose.

What do we want to buy, and what do we want to sell or not buy?

The chart answers that question: If rates are rising, buy commodities and sell bonds. 

Perhaps shorting bonds isn’t up your alley. That’s fine. It can be as simple as Ryan Detrick said yesterday: "We’re still underweight bonds.” 

It makes sense! And energy remains front and center, leaving other commodity subgroups and stock market sectors in the dust.

I know the market can be frustrating, especially now. Failed moves and whipsaws are no fun. But the markets are designed to frustrate us more often than not. 

Don’t let the challenging conditions get you down. It’s just part of the game. 

Take a deep breath and ground yourself by following the one trend permeating the markets – rising interest rates. 

Countdown to FOMC

The market is pricing in a pause in the hiking cycle through Q2 of next year.

Here are the target rate probabilities based on fed funds futures:

Click the table to enlarge the view.

This data is from the CME FedWatch Tool as of September 28, 2023.

Thanks for reading.

Let us know what you think.

And as always, be sure to download this week’s Bond Report!