Inflation And Bond Yields Likely Headed Lower

1.) YIELDS – The US 10 YR Treasury Yield broke to a bearish (downward bias) trend yesterday. The 30 YR Yield broke to a bearish trend back on June 11th. Is that good or bad? It depends on the lens you’re using. What it is saying, when looking through an investor's lens, is that the Cycle High for both INFLATION and BOND YIELDS is likely in, and the Fed will likely have to flip dovish in the next 3-6 months. If you look at the yield curve, which is traditionally the 10YR Yield minus the 2 YR Yield, it has been getting squeezed since February. Is that a problem? Not yet. But a rising and steeper yield curve is preferred over a declining and tight one. And it’s definitely preferred over an inverted curve where the 2s are higher than the 10s. The yield curve is currently at just 0.27%, so no “alarms” just yet. Macrowise, it would not be surprising to see a more deflationary signal in July with growth and inflation slowing together. Remember, it’s not the number alone; it’s whether it is decelerating from a previous (QoQ or YoY) print. July looks like we’ll see that with the June inflation print likely getting hammered with Oil down over -22% so far for the month of June. The market might be able to absorb that just fine though with the Fed's preferred inflation data (the PCE) at just 0.3% MoM (month over month) and 3.4% YoY, which is in line with expectations.

2.) LAG 7 – Back on March 27th, I commented that the Magnificent 7 haven’t been so magnificent lately (https://www.careformywealth.com/post/keeping-an-eye-on-the-mag-7). Back then, it looked like either the Mag 7 would start leading the market again, or the rest of the market would eventually roll over and follow them lower. Neither happened. Instead, the market just found new leaders. Today, while the S&P 500 continues to show strength, those same seven stocks are making new 52-week relative lows. In other words, they’re still going up, in some cases. But they’re no longer keeping pace with the rest of the market. So I guess the name change to LAG 7 is fitting so far. A declining line in the chart below just means the S&P is outperforming the Mag 7 names. What’s important is that these names are not dragging the market higher at this point. The rest of the market is saying that it’s not needed! Yesterday’s winners are sometimes tomorrow’s winners, but often they are not. This isn’t an argument against Nvidia, Microsoft, Amazon, or any of the other Mag 7 stocks. They’re incredible businesses, and I wouldn’t be surprised if several of them become even bigger companies over the next decade. But their stocks might not move as fast as many have experienced.

3.) CASH – Where’s the fuel for the market? U.S. households are sitting on $3.2 trillion of cash. That’s a lot and way above the normal trend. If markets keep squeezing higher, that cash could come rushing into markets as FOMO (fear of missing out) sets in. We’ll see. Investors are still more bearish (afraid) than bullish.