Bond Market Confirms - No To Rate Hikes

1.) RATES – Yesterday, I commented that the Fed will not raise rates at their September meeting. Now, the bond market is in agreement and no longer prices in a full hike by year-end. The Dec EFFR (Effective Fed Funds Rate) is at 3.84% vs. 3.63% current.

2.) GOLD – Slight overbought signal here…but this is for the very short term. That overbought condition can get washed out pretty easily with a sideways move to consolidate some recent gains from the breakout last week. I still think Gold is in a “buy the dip” mode.

3.) US DOLLAR – The Dollar Index (DXY) is confirming its bearish shift (downward bias). The short-term (15-day) gold inverse correlation to the US Dollar is now at -0.57. This is a decent tailwind, but much better on a longer 90-day timeline at -0.93! What does that mean? It means that the US Dollar is indicating that buying gold on dips is not as risky as it was a month ago. The consensus is also very net long (they own) the US Dollar at a statistically significant 2.46x 1-year Z score. What does that mean? Too many non-commercial traders are on the same side of the boat. A contrarian perspective would suggest that this is bearish for the US Dollar. Not insignificant is that the S&P 500 also has a -0.75 15-day inverse correlation and a -0.77 30-day inverse correlation. This is bullish for the index if/when the Dollar continues to weaken. What don’t I like short term? The S&P 500 has a -5% implied volatility DISCOUNT, suggesting complacency from the herd. Does that spell doom? No, but with VIX trading with a 14 handle and an implied vol discount, a little forward downward volatility would not be too surprising.