The recent strong U.S. Treasury sell off has the world marketplace unnerved. A Barrons headline Wednesday read: “The bond and stock sell-off has momentum. Here’s how it could end.” The story goes on to say “markets have decided to pay attention to the prospect of the Federal Reserve keeping interest rates higher for longer. And now that’s all they can see.” The story said the ways the bond market rout could end would be if the Fed stops or reduces its bond selling. Or, “something breaks.” The Barrons article added weakening U.S. economic data may be needed to help turn the tide of the higher rates narrative.
“Friday’s September jobs report could be the place for that to begin,” said Barrons. Indeed, traders are starting to look ahead to Friday’s September employment situation report from the Labor Department. The key non-farm payrolls number is expected to come in at up 170,000 compared to a rise of 187,000 in the September report. Wednesday’s big downside miss for the ADP National Employment Report—at up 89,000 jobs versus the consensus forecast of up 160,000–does give the bond market bulls some hope Friday’s more important U.S. jobs report from the Labor Department will show a cooling economy.
Last week I mentioned the closely watched benchmark 10-year U.S. Treasury note yield may rise into the 6% area in the coming months. In just one week’s time, that notion has become much more likely. As I write this, the 10-year U.S. Treasury note is yielding 4.768% and appears headed for 5% soon. For perspective, see the historical chart of the U.S. 10-year note dating back several decades. In the 1980s the 10-year note yield was above 10% for several years. On Tuesday, CNBC analyst Rick Santelli said some cyclical work he just completed suggests the 10-year T-Note will top out at well above 10%.
I want to reiterate that existing price trends in the bond and currency markets are strong and there are no solid, early clues to suggest those price trends are nearing an end—especially in the currency markets. That means the U.S. dollar index uptrend remains firmly in place, while most of the major currencies that trade against the greenback will remain in price downtrends. That scenario is bearish for metals and many other raw commodities. Reason: Rising bond yields are likely to crimp global economic growth and in turn reduce demand for commodities. Also, a strong dollar means that commodities priced in dollars on world trade markets will be more expensive to purchase in non-U.S. currency—also meaning less demand for them.
Importantly, the mistake a trader/investor could make at present is assuming that pivots in the currency and bond markets are close at hand. The “higher for longer” theme the marketplace had adopted for Federal Reserve interest rate policy has the past couple weeks changed to a “much higher for much longer” narrative. You need to take this new narrative into account in making your near-term and intermediate-term trading and investing decisions.
Stay tuned! Jim Wyckoff