Rates Are Signaling Inflation RE-Acceleration. Stagflation On The Way?

1.) RATES – Is the “moment of truth” for bond yields failing? Too early yet, but this move in rates is definitely hunting for bond owners. The US 10YR Yield is up at 4.70%... above the cycle high of 4.67%. That is NOT what bond, brokered CDs, or other fixed-income investors want to see. Yesterday, I pointed out that bond yields were approaching some serious down-trending resistance that has been in place for the last couple of years and that it would not surprise me to see rates reverse. So far, that is wrong. Breaking above and closing above the 4.67% high could easily usher in a higher rate regime in the near term. What is the market telling us? That inflation is reaccelerating AGAIN – just look at oil! Does this “force” the hand of the Fed to actually raise rates sometime between now and Q1? Looking more and more likely IF rates stay up above 4.67%. The 2YR Treasury yield…the “Fed proxy”…is hitting a new cycle high yet again at 4.35%. The yield on US 2-year Treasuries is up to its highest since Feb '25. That suggests the Fed is behind the curve. All this is pulling the yield curve down again after it failed at its trend level. While I’d prefer to see a rising yield curve, it isn’t signaling “recession” at this point either.

2.) OIL – Since I suggested you look at oil, here it is. Oil is now ready to test the upside level of the trend at $94. Oil is trading this morning at $92/barrel, up another +5.5%. You can go back to the comments I’ve been making on oil since July 2 when I suggested that if oil is to bounce, this is the spot. That was at $69/barrel. Shortly after that day, I suggested that $85/barrel would not be surprising. Well, here we are, and more! What could drive oil prices even higher? More uncertainty with Iran. Nice job, Gov’t. Massive buying to refill the SPR – Strategic Petroleum Reserve. Our Gov’t has now taken that reserve down to levels we haven’t seen since 1983. Again, nice job, Gov’t. If they started buying in size to refill this thing, prices could really move. Will they do something like that? Who knows. I’ll follow the signals. And right now, even though trend resistance is at $94, oil could very easily break toward $110 before it meets serious long-term resistance. Higher energy prices are just not what citizens need at this point.

3.) DOLLAR – The US Dollar is also signaling a few things. One, that uncertainty is bugging investors, and so there is increasing demand for US Dollars. And, two, that the Fed may be in a position where the market forces their hand on rates. A rising Dollar can often signal that the market expects higher rates, and so money would be better treated in Dollars (higher rates on those dollar deposits). Recently, the US Dollar Index (DXY) found support near its trend level (shaded area) and has since broken above a recent downtrend. Risk assets would prefer to see the US Dollar break back down. How it acts at $101.59 will be important. Closing below that would signal a lower high and the potential for it to move lower.