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 US Dollar Index (DX2.F) & CBOE 10-Year Interest Rate (TNX.I)

Equities have had a slow start to August so far with the S&P 500 index down around 4%. This comes after five straight positive months in a row starting in March (3.51%), April (1.46%), May (0.25%), June (6.47%), and July (3.11%). A seasonal pause or slowdown is normal based on historical averages in August and September. Inflation, as measured by the personal consumption expenditures price index, peaked at around 7% in June of 2022 and had fallen to 3% in June of this year. A robust economy have investors largely expecting the Fed's monetary tightening to be near its end, but some worry that the central bank could hold rates at the current level for longer because of sticky inflation and other reasons. The US Federal Reserve (FOMC) met yesterday and expressed concern about the pace of inflation and said more rate hikes could be necessary. The minutes showed that most policymakers continued to prioritize the battle against inflation and expressed caution overall. The Fed fund rate currently sits at a 22-year high at 5.25%.

The Fed faces a "tough balancing act" between risk of over-tightening of policy against the cost of an insufficient one. The minutes noted that they expected the economy to slow and unemployment to rise somewhat, but took out any commentary about the banking industry could lead to a mild recession that was in prior minutes as this is no longer a current concern. However, there was some concerns with commercial real estate could see a potential sharp decline in CRE valuations.

A strong U.S. retail sales report on Tuesday suggested upwards inflation pressure still exists which also could impact the risk of inflation staying higher than the FOMC wants to see. Strong economic reports like this might have the opposite effect on the stock market where it could end up keeping rates higher for longer than traders and investors want.

After the August meeting, investors are now betting heavily that the Fed won't raise its policy rate again for the Sept 19-20th meeting with a current 90% chance of unchanged rates.

In this issue of the Equity Leaders Weekly, we look at the CBOE 10-Year Interest Rate and US Dollar Index.

US Dollar Index (DX2.F)

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