CBOE US 10- Year Treasury Note Yield (TNX.I) & iShares US Industrials ETF (IYJ)
US traded interest rates have started to rise once again this week, with the 10-year treasury note yield regaining 3.80%, which has sparked a rally in the US Dollar and put a bit of a headwind in front of stocks, commodities and non-US currencies including Gold.
A number of factors have combined recently to shift expectations about US interest rates toward the hawkish side since the start of this month. The Fed continues to signal its intentions to keep raising interest rates even if at a slower pace and to keep rates high even after it pauses while it continues to fight inflation. Economic indicators like Canadian job growth, US nonfarm payrolls growth, and US retail sales suggest that the North American economy remains robust. The US Consumer Price Index did not decline as much as investors had hoped last month, suggesting the inflation fight could potentially drag on. Finally, Fed Vice Chair Brainard has left the US central bank to take a job at the White House, removing one of the historically more dovish voices from the FOMC.
The coming week is shortened by a Monday holiday in both the US and Canada. The main economic event of the coming week is Flash Manufacturing and Service PMI reports on Tuesday, the first peek at February economic conditions. The slate is otherwise dominated by more inflation, retail sales and housing reports from the US, UK, and Canada.
Earnings season has moved into its later innings. Retailers dominate the calendar starting with Canadian Tire today and then shifting stateside with Walmart and Home Depot reporting on Tuesday.
In this edition of the Equity Leaders Weekly, we look at the implications of the recent upturn in the US 10-year Treasury Note Yield, and at recent gains in cyclical sectors including industrials.
CBOE US 10- Year Treasury Note Yield (TNX.I)
After climbing though most of 2022, TNX.I peaked back in October near 4.25%. After that, US traded interest rates started to decline, but recent trading suggests that rather than starting straight into a new downtrend, TNX.I may be settling into a higher trading range.
In particular, support has emerged in the 3.35% to 3.50% range and resistance has appeared in the 3.90%-4.00% zone. A move out of this range could signal whether a new uptrend or a new downtrend is emerging with next potential resistance and support near 4.25% and 3.25% respectively.
The recent rebound in TNX.I has put pressure on US bond prices as their natural inverse relationship kicks in. In addition, the US Dollar has started to bounce back, sparking a correction in Gold and some commodities.
iShares US Industrials ETF (IYJ)
One of the most encouraging features of the 2023 New Years Rally has been its breadth. In recent editions of Equity Leaders Weekly, we have investigated how this has not just been a dead cat bounce of the most depressed stocks, this rally has had wide participation, including international equities, emerging markets and small caps.
Perhaps most significantly, some of the most core cyclical groups have been part of this rebound, indicating that investors are starting to anticipate improved global economic conditions this year, particularly as China continues to reopen.
The iShares US Industrials ETF (IYJ) peaked ahead of the overall market back in September of 2021 and declined with the overall market through to October, when its selloff was finally contained near a long-term 45-degree support line. Since then, IYJ has been increasingly recovering. Following a December rally, the shares consolidated in a higher range. This month, IYJ has broken out to its highest level since April, completing a bullish Triple Top pattern and an Ascending Triangle breakout to signal the start of a new upleg.
Potential upside resistance appears in the $110.40 to $113.75 area where vertical and horizontal counts, plus previous column highs cluster. Initial support appears near $99.95 where a 3-box reversal converges with the $100.00 round number.
Disclaimer: SIACharts Inc. specifically represents that it does not give investment advice or advocate the purchase or sale of any security or investment whatsoever. This information has been prepared without regard to any particular investors investment objectives, financial situation, and needs. None of the information contained in this document constitutes an offer to sell or the solicitation of an offer to buy any security or other investment or an offer to provide investment services of any kind. As such, advisors and their clients should not act on any recommendation (express or implied) or information in this report without obtaining specific advice in relation to their accounts and should not rely on information herein as the primary basis for their investment decisions. Information contained herein is based on data obtained from recognized statistical services, issuer reports or communications, or other sources, believed to be reliable. SIACharts Inc. nor its third party content providers make any representations or warranties or take any responsibility as to the accuracy or completeness of any recommendation or information contained herein and shall not be liable for any errors, inaccuracies or delays in content, or for any actions taken in reliance thereon. Any statements nonfactual in nature constitute only current opinions, which are subject to change without notice.