Global equity markets are selling off hard this morning as the probability of more rate hikes increase. The real action is in the bond markets as yields are rising.
The US 2 year yield actually broke out into new recent highs taking out the March 2023 peak. The 10 year yield is also breaking out above an important lower high level. Traders and investors must watch the daily candle close. Especially on that 2 year yield as the close could confirm a breakout which would mean higher yields.
And it isn’t just confined in the US.
German yields are spiking.
British yields are spiking.
Even Japanese yields are popping.
Remember, when bond yields are spiking it means that money is LEAVING the bond market. Bonds are being sold off which leads to a spike in yields. When we applied the risk on and risk off narrative which became prominent after the GFC 2008, money leaving the bond markets meant that money would be flowing to the stock market (risk on). When there is fear, money runs into the bond market and out of stocks (risk off). But things have changed. The narrative is now all about interest rates.
Money recently flowed into the bond market because many traders and analysts thought the Fed and other central banks were finished raising interest rates. It would make sense buying bonds because these would be the most high yielding levels if you believed the next move would be an eventual rate cut. But it looks like central banks are not finished with raising interest rates.
Yesterday we had the Fed minutes. Many videos I watched and articles I read stated this as a ‘non event’. A day later and we can clearly see it was not.
The Fed minutes indicated that Fed members see more rate hikes ahead but at a slower pace. Once again, the action in the bond markets and rising yields indicate what the markets think the Fed will do.
Those who say the Fed and other central banks will not raise interest rates point to a slowing economy. That central banks will be forced to pause and even cut rates due to a recession. The Fed has been adamant in stating that their soft landing approach is still in play. That they will raise interest rates by enough to bring inflation down to their level and avoid a recession.
Recession or economic slowdown? No, says the Fed. And the data they use to back their statement comes from the jobs market. The US labor market remains strong and robust. Private sector jobs data for June 2023 came out today and more jobs are being created than expected.
Private sector jobs surged by 497,000 for the month, well ahead of the downwardly revised 267,000 gain in May and much better than the 220,000 consensus estimate. The increase resulted in the biggest monthly rise since July 2022.
Leisure and hospitality led with 232,000 new hires, followed by construction with 97,000, and trade, transportation and utilities at 90,000. Annual pay rose at a 6.4% rate.
No slowdown just yet and the data indicates that the US consumer is still spending money as consumer facing service industries had a strong June.
One data point to watch for will be the US employment non-farm payrolls (NFP) data which will come out on Friday. If it comes out strong, then the likelihood of more rate hikes, including one in July, will increase significantly.
In summary, a hawkish Fed and strong employment data are leading the markets to think more rate hikes are coming. Hence the rise in bond yields and the impact on the stock markets. Rate hike fears are increasing.
Some would say there is some fear instead, but I do not see money running into the US Dollar or the Japanese Yen as I would expect to see. Sure, the VIX is rising but remember this is a volatility index, not necessarily a fear gauge.
Regular readers may recall an article I put out in mid June titled, “Stock markets approach key resistance. Is a new downtrend about to begin?“. In that article, I warned readers that the markets are approaching very key resistance levels. Levels where we would see a reaction. Either the beginning of a major downtrend, or just a corrective phase in a long term uptrend.
Here’s the accompanying YouTube video:
As you can see, the S&P 500 and the Dow Jones are selling off at our resistance zones. Other global equity markets are doing the same.
The higher low for the S&P 500 is the 4335 zone. As long as a higher low remains intact, the uptrend is in play. A close below this level would mean a deeper retracement down to 4200.
Keep your eyes on those US 2 and 10 year yield charts. The daily candle closes will be highly significant drivers for the equity markets. A confirmed close breakout daily candle could lead to another major spike in yields on the breakout momentum. This would lead to another major red day for global stock markets.
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