The market environment has been shifting in favor of the bulls all summer.
Breadth thrusts are firing as participation beneath the surface expands. Risk assets – commodities and stocks alike – are reclaiming critical levels of former support.
This is a huge departure from earlier in the year.
But one aspect of the environment remains the same – interest rates. Yes, rates have come off their June peak. And, yes, US yields have paused at a logical level marked by a series of former highs.
That’s all true, and it all makes perfect sense.
But we still find ourselves in a rising-rate market as the underlying uptrend remains intact – for now.
Earlier in the month, we broke down the ranges in the 30-, 10-, and 5-year US yields. Today, we'll turn our attention overseas.
Here’s a quadruple-pane chart of global yields, including German, UK, French, and Spanish benchmark rates:
Global yields have provided us with some of the best confirmation for US yields during the current cycle, and we don't think that will be any different this time around.
When we look at some of the major European yields today, there’s one key difference separating them from the US benchmark:
European yields are holding above their prior-cycle highs from 2018.
On the other hand, the US benchmark broke above its corresponding levels, only to retreat lower and churn sideways.
Now, with the US 10-year stuck below its prior cycle peak, there’s a great deal of information we can gain from how these European interest rates react at their respective levels.
They’re holding for now. As long as that’s the case, we have to err in the direction of the underlying trend, which is higher.
On the flip side, if the German, UK, and other major global yields slip back below their 2018 highs, US rates most likely undercut the lower bounds of their ranges and follow to the downside.
Of course, the best-case scenario for the bulls is if yields just chop sideways, or simply not move in either direction in earnest.
Stocks want to see slow and steady action from the bond market.
We're going to continue to keep a close eye on yields across the pond in the coming weeks and months. If they lose their former cycle highs, things could get dicey for cyclical areas of the market.
Stay tuned.
Countdown to FOMC
Following the release of the minutes from last month's Federal Open Market Committee meeting, the market is pricing in a 50-basis-point hike in September and again in November before settling at a terminal rate of 3.50% to 3.75% by December.
Here are the target rate probabilities based on fed funds futures:
