Home Forex Stock Week Ahead: CPI Report Could Lead to 10-Year Yields and US Dollar Rising

Stock Week Ahead: CPI Report Could Lead to 10-Year Yields and US Dollar Rising

by SuperiorInvest

This week it's all about price inflation, with import/export price reports and , and . It is expected to rise 0.3% month-on-month, up from 0.4%, while rising 3.4% year-on-year, up from 3.2%. Meanwhile, it is expected to rise 0.3% month-on-month, up from 0.4%, and 3.7% year-on-year, up from 3.8%.

CPI swaps expect CPI to be 3.4% YoY and 0.3% MoM, which is in line with consensus estimates.

The CPI figure has been higher than analysts' median estimates and the CPI exchange price for some months now. Going back to July, the CPI report fell below the CPI swap price only once in November.CPI swap prices

So another big number wouldn't be good and would likely continue to push rates higher across the entire Treasury curve. Last week, after the solid , they ended the week with a rise of 4.75%, while the rate rose to 4.4%.

The 2-year yield appears to have formed a long-term cup and handle pattern and is now about to break that pattern, with the potential for the rate to rise to around 5.1%. It may seem surprising to hear that the 2-year rate could rise this high from a fundamental base.

However, let's face the facts. Given the latest round of employment data and expectations based on CPI swap prices, where the year-on-year rate is expected to remain around 3.2% for the coming months, it would make sense to remove further rate cuts from the market prices, which would result in a higher 2-year rate.

Daily 2-Year US Bond Yield Chart

Additionally, we are seeing the “Powell” indicator, which is simply the spot rate on Treasury bills minus the forward rate on 3-month and 18-month Treasury bills, increase to -91 basis points. This is the highest level since the end of November. It has been rising steadily as the forward rate on 3-month and 18-month Treasuries rises to the spot rate, which is just another way to see how the market is taking rate cuts out of the equation. general.Powell Indicator

The 10-year interest rate has a short-term cup and handle pattern, which has skyrocketed. The rate surpassed the key resistance of 4.35% to end the week at 4.4%. At this point, it seems possible that the rate will rise to around 4.5%, if not higher.US 10-Year Bond Yield Daily Chart

Meanwhile, spreads between US overnight rate expectations and those of other central banks continued to widen, and this widening should drive gains in the coming weeks, especially if US data points to a higher and longer-term monetary policy stance by the Federal Reserve.

US Rate Expectations

Additionally, we are seeing a widening of long-term spreads, such as between the 10-year US bond and the US bond, which appears to have come out of a bull flag. This suggests that the dollar should strengthen further from now on as the spread widens further. The 2% region has been a large resistance zone for this spread, and a move above that level should lead to a significant widening, potentially to around 2.3% or more.US10Y-DE10Y-Daily Chart

A wider spread should strengthen the dollar against the . With support for the Euro currently at 1.07, this could lead to the Euro suffering a significant collapse against the Dollar and potentially send the Euro back to parity against the Dollar.

EURUSD-Daily Chart

Wider spreads are likely to lead to wider spreads on high-yield debt as well, and that has already started to happen with the CDX high-yield index rising to 340 last week.High Yield CDX Index

The combination of higher rates, a stronger dollar and wider credit spreads should lead to tighter financial conditions and lower equity valuations. How low will depend on the extent to which financial conditions are tightened, and based on current economic data, one would think that conditions would need to be tightened a lot.

While one may be left with the impression that the stock market didn't care about the jobs data, remember what was discussed on Thursday about rising one-day implied volatility levels and the drop in volatility that would likely follow. , and that's what Friday's “rally” was about.

It was not to celebrate a good employment figure; It was simply due to volatility restarting, in the same way we saw after the March 11 CPI report and February 21 Nvidia results.

VIX Daily Chart

A good portion of the Nvidia (NASDAQ 🙂) rally was recovered in the following days, and the entire IPC rally was recovered in the . What was also notable on Friday was that the Nasdaq attempted for the third day in a row to surpass the exponential moving average of 10 days and it failed, closing below it for the fourth day in a row.

It seems clear at this point that the moving average is serving as resistance. If we have formed a diamond pattern on the Nasdaq, which it appears to be, then I would expect to see the Nasdaq below the February 21 low at 17,330.Nasdaq 100 daily chart

It closed to the right at the 10-day exponential moving average and has now struggled at that level for four days in a row, suggesting a possible trend reversal for the index. Furthermore, the index's significant uptrend has been broken from the October lows.

At the end of October, the index was trading at 4,100 points when a rebound began that seemed to make no sense, based on the relaxation of financial conditions and systematic flows. I see no reason why we cannot return to that level in the coming months as financial conditions tighten, triggering systematic sell-offs.S&P 500 Index Daily Chart

Meanwhile, Nvidia is flirting with the $850 level last week, and a break of the $850 level would set up that double-top bearish engulfing pattern in the stock and potentially create the opportunity for the stock to pull back lower, filling the gap at $675.

NVDA Daily Chart

Have a good week.

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