- We’ve just seen one of the largest downward shifts for the US yield curve in 2023
- If risk-free rates remain contained, it will have implications for asset valuations further out the risk spectrum
- S&P 500 and gold are two markets that could benefit, especially if accompanied by a soft economic landing
A not-so-hawkish press conference from Federal Reserve chair Jerome Powell, a sharp deterioration in US manufacturing activity and relief over the amount of longer-dated Treasury issuance over the next three months left its mark on bond markets on Wednesday, resulting in the largest one-day downward shift in the US yield curve in months.
The moves were particularly pronounced further out the curve, and for inflation-protected securities, providing near-term relief for low and non-yielding assets such as gold and the S&P 500. The question traders should be pondering now is whether the highs for yields are in, creating a potential structural tailwind for these markets, especially if accompanied by a soft economic landing.
Enormous shift lower for US yield curve
For those keen to get across the finer details on what drove yields lower, here’s a great wrap from our team in the United States. This post is more concerned about the implications should the move prove to be more than transient, coming hot on the heels of some bullish statements from former bond bears and the decision from the Bank of Japan to continue intervening to suppress Japanese bond yields following its monetary policy decision earlier in the week.
Relative to 24 hours ago, benchmark US 10-year Treasury yields are down over 14 basis points, the largest decline since the US regional banking crisis in March. The move in real inflation-adjusted bond yields was even greater, tumbling close to 20 basis points, the second-largest fall this year.
Benchmark real yields – which are calculated by subtracting yields on 10-year Treasury inflation-protected securities from 10-year Treasury yields – have now been categorically rejected above 2.5% on six separate occasions over the past few months. The chart below tells the story.
Source: Refinitiv
Bond bid has implications for asset classes like S&P 500 and gold
What the price action suggests is that Treasury yields, relative to the inflation outlook, are currently offering sufficient compensation to encourage buyers to wade back in. It’s not a given demand will remain by any stretch, but if it does, the implications of risk-free rates stabilising or falling will be important for every financial asset further out the risk spectrum.
On that front, Friday’s US nonfarm payrolls and ISM non-manufacturing PMI reports, and several auctions of US Treasury notes and bonds next week, provide potential catalyst to dictate the medium-term trajectory for yields.
Apple earnings could shift the narrative for S&P 500
One market that will be paying attention is the S&P 500. Looking at the technical setup, with earnings from Apple out in less than 24 hours, and bond yields well off the cyclical highs set early last week, you won’t come across many more important days when it comes to US equities. It’s huge.
Having reclaimed 4200 in the wake of the Fed’s interest rate decision, the index is now staring the 200-day moving average, an equally important level, right in the face heading into the earnings report from the largest constituent in the index. Talk about make-or-break moments. RSI and MACD are both on the cusp of breaking their downtrends, signaling a potential shift in market momentum.
Should yields remain well behaved, Apple’s earnings after the closing bell have the potential to change the narrative surrounding the technical picture. Combined with the calmer macro environment, that could easily determine the trajectory the index takes heading into year-end.
A sustained break and close above the 200-day moving average may open the door for a sustained rally towards 4386 with 4268 and 4325 the initial levels to watch. Should the index not clear the 200-day successfully, a retest of support at 4110 would likely be on the cards.
Gold may sneak another look above $2000
Outside of equities, gold is another market worth looking at given the implications for its performance with real and nominal bond yields seemingly capped in the near-term while a war continues to rage in the Middle East.
It was a tad surprising that bullion didn’t perform better in response to the sharp decline in real yields and softness in the US dollar on Wednesday. But, then again, it’s been surprising how resilient it’s been over the course of this year given how elevated yields and dollar have been.
On the daily chart, gold bounced back above $1980 having fallen through support earlier in the session, generating a neutral doji candle. If yields remain contained and the price continues to hold above this level, it may prompt bulls to take another look above $2000. If and when that happens, the longer it holds there, the greater the likelihood we may see a retest of record highs.
On the downside, gold has attracted buying on dips below $1965 with further support located around $1946.
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