The week of February 13th is significant, with , , , a ton of Fed speakers, a , and a . Last week, rates broke out after a 30-year bond auction didn’t perform well. The auction results ended up sending rates sharply higher across the curve, along with Fed Chairman Jay Powell indicating that the Fed has more work to do and that rates would have to stay higher for longer. Depending on the data, he even noted that the Fed might have to go higher than thought at the December FOMC meeting.
All of this led to a dramatic move higher in the Fed Funds futures, with the August contracts peaking at 5.18%. That rate is higher than the Fed’s terminal rate in the December summary of economic projections of 5.1%. Meanwhile, the December contract is now trading at 4.98%, as the market has quickly shifted to the Fed’s point of view on rates.
Fed Funds Futures
1. SOFR Futures
As I highlighted in this week’s video, some traders are placing bets that the Fed’s terminal rate peaks at 6%, based on SOFR September 94 Puts, which have seen their open interest levels explode in recent days.
This week’s CPI report will have a big say in what happens, and while analysts are looking for CPI to climb by and 6.2% y/y, the Cleveland Fed sees CPI climbing by 6.5% y/y and 0.65% m/m. If you get numbers that look like the Cleveland Fed’s estimates, it will be a massive blow to the hopes of many that inflation was cooling because the 6.5% y/y rate would match that of the December inflation rate.
Cleveland Fed CPI Forecasts
3. 30-Year Rates
A lousy auction on Thursday caused the rate to surge and push above at least one downtrend line, setting up a battle with a second downtrend at 3.9%. The break of the second downtrend quickly sets the 30-year up to re-challenge the 4% barrier.
30-Year Rates Daily Chart
4. 10-Year Rates
For the , it appears to have already broken both downtrend lines and is on a path currently to challenge the 3.9% level.
US 10-Year Rates Daily Chart
5. Corp. Debt – LQD
Additionally, the has broken down and appears to be heading toward 105.30.
6. High Yield – HYG
The has not broken an uptrend yet, but it has broken support at $75.75 and appears to be heading to the uptrend line to test whether it can hold or not around $74.
7. S&P 500 – SPX
The has fallen below a short-term uptrend and below its 10-day exponential moving average. When the index has tended to rise or fall below its 10-day EMA, it has marked a change in trend. In this case, it has only dropped below that moving average for two days, which is not long enough to verify a change in direction. But if the index is trading below that 10-day EMA at Tuesday’s close, I think it would confirm that the trend has shifted to bearish.
8. NASDAQ 100 – QQQ
The ETF has broken an uptrend that goes back to the beginning of January and is also trading below its 10-day EMA. So, like the S&P 500, the QQQ is in danger of a further drop, especially if that CPI report comes in hotter than expected.
9. Volatility – VIX, VVIX
In an evening note for subscribers to my daily newsletter, RTM Lite, I noted that the has broken out, along with the . The break out has caused the ratio of the VIX to VVIX to drop significantly and move back to a range that falls within the historical norms. I noted, “The ratio is now at levels not typically associated with market stress. However, I am not sure that the relationship should drop back to its lows, as that would imply a state of tranquility, and I don’t believe we are currently in a tranquil period.”
Since then, we have seen the VIX ratio break out of its downtrend, which could mark a significant change in trend now that volatility appears to have reset.
10. Dollar – DXY
What is also taking steps to break out is the , which broke one downtrend and is now testing its 50-day moving average and a secondary downtrend. A rally beyond the moving average and the downtrend would push the dollar higher toward $108.
11. Financial Conditions
By the way, rising yields, a strong dollar, increasing volatility, and falling stocks are not happening simultaneously purely by chance. No, these are all interconnected as financial conditions begin to tighten, as noted by the Goldman Sachs Financial Conditions Index.
GS Financial Conditions Index Daily Chart
Have a great week!