There’s a notable lack of new catalysts Wednesday to drive the market higher or drag it down, meaning the range-bound trading seen so far this week might continue.
FIGURE 1: Figure 1: RATES DOWN? NO PROBLEM: Despite 10-year yields (purple line) dropping dramatically over the last month, the Financial sector (candlestick) has performed pretty well. That’s especially true in the last week. Data Source: Cboe, S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
Could Yields Be Looking Up? It’s probably too early to talk seriously about any sort of “bottom” in Treasury yields, especially with the benchmark 10-year yield still near 20-month lows at around 2.11%. However, one analyst speaking on CNBC Tuesday pointed out what appears to be a “double bottom” in the 10-year yield chart earlier this month when yields fell to 2.07% one day and then 2.05% a few days later. They’ve since bounced nearly 10 basis points from the low. This rise in yields might be one reason some of the so-called “defensive” sectors, including Utilities, have come under pressure this week. Typically, Utilities do better when yields are low because investors often flock to dividend-paying sectors at such times. Yields might also have already built in chances for a near-term Fed rate cut, which have grown significantly over the last few weeks according to Fed funds futures.
Fed Funds Futures Say? Speaking of rate cut chances, they diminished slightly for next week’s meeting after President Trump announced he’d suspend plans to immediately slap tariffs on Mexico. Chances for a rate cut at next week’s Fed meeting recently stood at 19%, according to CME futures trading, down from highs above 25% at times last week. Chances for a 25-basis point cut in July are steady near 66%, but the odds for two rate cuts between now and July—something one analyst surprised many on Wall Street by predicting recently—are only 14%, according to the futures market. Last week’s soft jobs number might give the Fed some additional cover if it wants to cut rates, and producer prices released Tuesday for May also looked mostly benign. Whatever the case, the futures market as it stands now is predicting a better than 75% chance that rates will be lower by the end of July than they are now.
Dollar Eases As Rate Cut Odds Increase: Recent weakness in the dollar index might reflect increased rate cut chances, with the dollar consistently trading under 97 lately after spending most of April and May above that level and even climbing to nearly two-year highs north of 98 at times. Lower rates often weigh on the dollar because they tend to increase the risk of inflation. Another weight on the dollar right now could be the euro, which hit three-month highs vs. the dollar earlier this month and remains near those levels at 1.13. That’s still down from highs above 1.24 early last year, but shows a renewed energy in the euro. The euro seemed to perk up a little after the European Central Bank’s (ECB) recent meeting where ECB President Mario Draghi said the ECB would consider lowering rates and renewing stimulus if the European economy continues to stumble. Hopes of a stimulus improving Europe’s economy could be helping the euro, and that in turn might be weighing on the dollar.
While the dollar looks softer, its relative weakness might come too late to really give U.S. multinationals much assistance during the three weeks left of Q2. The greenback’s pop earlier this quarter potentially made U.S. goods more expensive for overseas customers, which might hurt companies in the Industrial, Materials and Info Tech sectors that depend on exports for big chunks of revenue. Many U.S. companies expressed concern about the strong dollar’s impact in their Q1 conference calls, and it wouldn’t be all that surprising to hear more of the same in Q2 earnings calls.
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