From the desk of Tom Bruni @BruniCharting
While that segment was about Mid-Cap Industrial stock Herman Miller Inc., a big part of that thesis is that we’re seeing US Rates begin to stabilize.
The chart I want to share today is the Regional Banks/REITs ratio, which highlights an “Interest”-ing divergence between Equities and the Bond/Commodities markets.
The logic behind this ratio is simple. If equity market participants are expecting higher Interest Rates, they’ll be buying Regional Banks which benefit in that environment. If they are expecting lower Interest Rates, they’ll be buying REITs which benefit in that environment.
Last year we were seeing a significant divergence as this ratio made lower highs and US 10-Year Yields made higher highs, with Equities ultimately being right and Yields collapsing after failing to hold above 3%.
Click on chart to enlarge view.
Now we’re seeing this ratio hold its April lows as the 10-Year breaks its 2017 closing low of 2.06 and is consolidating as momentum diverges.
Will this be a failed breakdown? Intermarket signals remain mixed at best.
On the one hand we’re seeing defensive sectors/factors like the Minimum Volatility Factor relative to the broader market making lower highs, both in the US and Globally.
Here’s the Min Vol EAFE Index / EAFE Index putting in a lower high relative to its 2018 highs.
We’re seeing the same in Consumer Staples, Utilities, Dividend Factor, etc.
If equity market participants were pricing in a continued crash in Bond Yields, they’d be bidding up these sectors and pushing them to new highs on a relative basis.
We’re not there yet.
On the other hand, other ratios like TIPS/20+ Year Treasuries and Copper/Gold continue to move lower (albeit with waning downside momentum), pricing in lower growth/inflation expectations.
I’m in the camp that Interest Rates are going to head higher over the near-term. There’s no doubt that the structural trend is lower, but the evidence continues to build that Rates could mean-revert throughout this quarter.
What do you think? Let us know!