Pretiorates' Thoughts 49 – Interest rates are set to fall again, but for how long and by how much?

Published on September 20th, 2024

In our analyses, we regularly examine current movements, identify possible influencing factors and assess the general market situation. However, these are not recommendations, but merely opinions and food for thought.

Hello dear readers!

Whenever three-month US Treasury notes trade higher than 10-year US Treasuries, the interest rate cycle is near a top. This time, the market had to wait longer than usual, but the indication was confirmed again...

The Fed reduced the Fed fund rate by 50 basis points and indicated that another 50 basis points are possible by the end of the year. However, the US Treasury with a term of 2 years is currently pricing more than 125 basis points for the next two years...

This is also confirmed by the futures...

Even if the Fed does not want to talk about a recession, the Heart Beat of the US economy still sees a 69% risk of a recession. Before the Fed meeting, this was 71%, so the Fed's words have done little to calm the situation...

By contrast, the Citi US Economic Surprise Index rose sharply recently. This does not confirm expectations of a strong potential for further interest rate cuts...

It is also interesting to note that the long term bond market volatility cycle is again pointing to the possibility of rising volatility over the next few months – which may indicate unrest in the bond market...

However, the US dollar is likely to come under scrutiny even before the bond markets. Its strength decreased from 83% to just 33% within a month...

The US Dollar Index is now only just above the 100 mark and could also fall below the August low. This would be tantamount to a double sell signal. The market pendulum is also falling and a test can be expected in the next few days...

Copper rises during positive economic cycles, Gold during negative cycles (boom or bust). The Copper/Gold ratio is also very bearish for the US economy, as already shown by the heartbeat. The real market yield would therefore have to fall quite a bit, which in turn would be positive for the gold price...

However, compared to the S&P500, it shows that it is correctly priced...

By contrast, the comparison with the real US Economy Indicator shows that small and mid-sized stocks are trading at too low a price. The Russell 2000 could outperform the S&P500 index...

That’s it for today!

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