What Will Rates Tell Us As The Fed Gets Ready?

1) US DOLLAR – Losing value? Against what? It’s not just the U.S. dollar that has been making new all-time lows relative to real money…Gold. Nearly every major currency in the world has been doing the exact same thing. The difference is that most of them broke down years ago. The dollar, along with the Swiss franc, was simply among the last to follow. So this is not necessarily a story about the dollar collapsing on its own. It’s a story about gold being in a massive bull market and fiat currencies everywhere losing ground against it. There’s another important piece. The U.S. dollar has long been the world’s ultimate safety trade. When investors panic and rush out of stocks, they go to the dollar. Over the past couple of years, there’s been little demand for safety. But lately, something may have started to change. Sentiment toward the dollar reached an extreme last month…you might remember the Feb 23 issue of Barron’s I showed you then, which came out very bearish. Then the US Dollar Index (DXY) went up about 3%. Nice timing by the media again. Now it’s pressing up against one of the more important levels…$100. So this could be an important test. If the dollar breaks out above this level and holds, it likely means something else is happening beneath the surface…maybe a renewed flight to safety. But does a breakout above this level spell doom for stocks? No. In both 2023 and 2024, the USD Index hit that $100 level and bounced higher, and in both of those instances, stocks did just fine. Volatility and flows will likely dictate how stocks move.

2) RATES – Another test is coming up, but this time it’s for rates. Will they hit support and bounce with the expectation of rising / accelerating inflation? Or will they break down as growth slows? This is the exact problem the Fed is wrestling with right now, given the rise in oil, which will affect CPI measurements. Oil at $100 is not the end of the world. Everyone knows it won’t last forever, and markets will price that reality long before anyone does. But will the Fed react to it? The US 10YR Treasury yield falling toward 4.15% would not be a surprise, but how it acts there will be telling with respect to what markets expect. The 10YR Yield is overbought here, so we might even see 4.08% before a “reaction.” Tomorrow is PPI day and Fed decision day. So we’ll see soon enough.

3) OIL – I mentioned that oil at $100 isn’t the end of the world. It’s not great for consumers, since a rising gasoline price is like a tax. But it’s not likely to last. People have very short memories when it comes to markets and price “shocks.” The recent rise in the price of spot isn’t exceptional. As you can see below, there have been a number of times markets have had to contend with spikes in the price of oil.