Are Rates Ready To Drop?

From the Desk of Ian Culley @IanCulley

So far, the dollar-yen is playing its part with a little help from Tokyo.

Falling dollar, falling rates, falling dollar-yen…

That’s the mantra reverberating throughout the market. 

But will interest rates get on board?

Check out the US 10-year yield climbing within a four-month channel: 

The 10-year is reacting to the channel’s upper boundary after stalling 25 basis points short of its October 2023 peak. 

Those former highs and rising trading range mark a logical area to witness a near-term pullback.

Plus, interest rates are trending within a broader corrective wave, and momentum is posting a bearish divergence – two data points suggesting lower yields in the coming weeks.

But can we expect a more pronounced pullback that could last months?  

While the most recent momentum divergence is undoubtedly tight, a similar pattern exists between the US Dollar Index $DXY and rates:

DXY peaked in early October, preceding the benchmark rate by approximately two weeks. The same pattern unfolded last month, with DXY ticking the top on the 16th and the 10-year on the 25th.

I might be splitting hairs here – but the pattern exists.

I can see the DXY and the 10-year yield following the same path as they did late last year, steering the markets into Q3.

If so, a weaker dollar and declining yields would produce a tailwind for the technology sector, consumer discretionary stocks, and the broader averages.

We all know US equities could use a boost heading into the summer doldrums – not to mention the relentless bond market crash.

What do you think?

Will rates finally take a breather?

Or will the 10-year digest 5.25% before a substantial pullback? 

–Ian

Countdown to FOMC

The market is kicking the probability of the first 25-basis-point rate cut further down the road to the November meeting.

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 May 2, 2024.

Thanks for reading.

Let us know what you think.

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