Overview
US 10-year yields broke higher this week after strong earnings results, implying that the Fed will raise its terminal rate to slow a resilient economy. (The Atlanta Fed GDPNow estimate shows a potential expansion of +2.9% for Q3:2022.)
Measures of US inflation are being pushed higher by the cost of shelter. Even though the Zillow Observed Rent Index (ZORI) has peaked, the shelter component within the CPI is still heading firmly higher, and this series may not peak till early next year. (September’s median rent data showed the first month-over-month decline of this year.)
Since the FOMC does not control the major factors affecting inflation, all it can do is keep raising rates aggressively, hoping to dampen demand. However, some FOMC members are now getting worried about their rapid pace of rate hikes.
Key Question
The market is hostage to inflation data, with PCE on deck next week. Are rates about to climb even higher? We explore them in detail below.
Performance Summary
The market built upon last Thursday’s reversal from the 3500 level on the SPX. The Dow Jones 30 Industrials rose to its 50-day simple moving average, the only one of the major market indexes to do so.
The sensitive Net Bull/Bear balance oscillated around zero before closing just a tad below the +60 level needed to confirm an uptrend.
Our Diversified Trend Index closed at +100, thus turning bullish after being solidly bearish last week.
This week's rally synchronized nicely with our analysis of the triple-bottom possibilities last week.
T-Note Chart Analysis
A potential reversal in the 2-year T-Note yields helped fuel Friday’s rally. As the chart shows, the trend in the 2-year yield has formed an ascending wedge. As a result, a downside breakout would help stocks, and a close below the red trailing stops would fuel a strong rally.
The S&P-500 index futures edged closer to an upside breakout. The short-term COST1 oscillator is now at +100, usually a sign of decent upward momentum. Support is now at the lower band. We need a low above the upper band to signal an uptrend.
The key to a sustainable market rally is improvement in the 10-year rate, which is hostage to inflation data. Next week we will get PCE and GDP data, which will pave the way for a 75-bp increase in the Fed Funds rate at the next FOMC meeting in early November. Crucially, those data will also influence the evolution of the 10-year rate. Currently, the 10-year note is near critical support via Fibonacci extensions.
There is substantial event risk on the horizon, with inflation data, the FOMC meeting, and elections over the next three weeks. However, any push higher by stocks will turn our indicators firmly bullish.
Wrap-up
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Disclaimer
And now for some housekeeping. This publication is for “edutainment,” education, and entertainment, not for investment advice. Past performance is not necessarily indicative of future results. Our disclaimer at chandeindicators.com is included herein by reference.