Home Rates Higher-for-Longer; Vax U-Turn in Progress

Rates Higher-for-Longer; Vax U-Turn in Progress

user profile picture davefairtex Feb 12, 2023
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The buck rose 0.78 [+0.76%] to 103.53 this week, managing to close above the 50 moving average (MA) on Friday for the first time since the big decline began back in November 2022. My weekly DX (dollar) model isn’t quite in bullish mode just yet, but as you can see, this is the first two-week rally for the buck in four months. The “swing low” candle is mildly bullish as well.

Note that Powell talked about inflation on Tuesday. CNN provides some of the details:

“We didn’t expect it to be this strong,” Powell said of the January jobs report, which showed the U.S. economy added 517,000 jobs. “It kind of shows you why we think that this will be a process that takes a significant period of time.”  (Source – CNN).

Powell also specifically blamed non-housing services. We have a shortage of services workers. Note that higher-for-longer should theoretically make the buck stronger, due to international capital flows coming into the U.S. to collect on those higher rates.

Possibly as a result, rate moved higher across the board, with the 10-year rising the most, +14 basis points (bp) to 3.67%. That’s bad if you already own the longer-dated bonds, since bond prices decline in value when rates move higher. My weekly DGS10 (10-year Treasury) rate chart now has the 10-year rate in an uptrend, and TLT (a long-term bond fund) fell 3.10% on the week, with my model now showing TLT in a downtrend in both daily and weekly timeframes. Why is this important? A lot of pension funds own “low risk” long term government debt. If they borrowed money to buy the long term debt to multiply their returns back when rates were very low, sooner or later, they’ll blow up.

Along those same lines, the crappy debt fund (JNK) which is full of what I like to call “bonds of companies that have multiple co-morbidities” plunged on the week, dropping 2.07%. These are also “canaries in the coal mine”, meaning it is one of the most sensitive risk-off instruments. JNK’s candle print was extremely bearish, it closed below both the 50 and 200 MA lines, but my model doesn’t quite have it in a downtrend just yet.

SPX (S&P 500) fell three days out of five, but only fell 46 points [-1.11%] which isn’t a very big decline.

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