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.

The US Dollar Index (DX2.F) renews a six-week high around the mid 103's as the Fed minutes flag inflation woes. The FOMC minutes suggest most policymakers priority the battle of inflation and keep rates at the current level (or higher). This should impact the US Dollar positively in the near-term as a hawkish stance could keep rates higher for longer, along with China's economic woes, this could make the U.S. Dollar more attractive. Gold prices fell for an eighth consecutive session, settling at their lowest levels since July 6th as higher Treasury yields and a firm U.S. Dollar have kept the pressure on Gold.Gains in the US Dollar have the potential to significantly impact the earnings of US companies in the coming quarter. US companies with large overseas operations and exporters could be impacted quite negatively relative to companies who are importers or are more domestically focused.However, looking at a 1% chart shows a different story than the above commentary in light of the longer-term picture. DX2.F is still in a significant reversal starting in October of 2022 continuing downwards with only two 3-box reversals, which is where it sits today. Minor resistance is right above at 103.67 while further resistance can be found at 105.75. To the downside, support can be found at 98.64 and below this at 93.85. With a SMAX score of 3, DX2.F is exhibiting near-term weakness across the asset classes.

After much consolation in 2023, the CBOE 10 Year Interest Rate (TNX.I) is rechallenging its prior highs and looking to move up to new all-time highs. Treasury yields have been generally climbing overall as reports have painted a picture of a solid economy pressuring stocks with high bond yields. Yields have widened further following the release of the Fed notes which increased expectations of another possible rate hike and/or keeping the rate elevated for longer than many expected.Up against resistance at 4.193%, this level is expected to break based on the recent news and resistance at 4.63% would then come into play. Further resistance above could then be found in the 5.011% area. To the downside, minor support can be found at just below 4% and further support at 3.724% coming into play, which was the low from July.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.