CBOE Interest Rate 10-Year (TNX.I) & RBOB Gasoline Continuous Contract (RB.F)

A significant shift in market sentiment appears to be underway across asset classes this week. Better than expected Manufacturing PMI reports from around the world, and stronger than expected US ADP payrolls have suggested that the world economy has remained resilient and may even be improving. Signs of an improving economy, particularly in China, has boosted resource demand expectations and commodity prices with Crude Oil, Gasoline, Silver, Copper, Cocoa and Coffee rallying this week. This in turn has boosted inflation expectations, which also turned up in rising US manufacturing prices, although slowing growth in US service prices offset this slightly.

Amid signs inflation may be picking up again, investors started to pay more attention to the neutral-hawkish comments coming out of central bankers who continue to reiterate the “higher rates for longer” party line and with some even starting to cut back the number of rate cuts they are expecting this year. This shift has sparked a rally in treasury yields sending the US 10-year treasury note yield up toward 4.40% from 4.20%.

These developments have had a twofold impact on equity markets. First the advance in indexes that started back on November 1st appears to be stalling. Last week the majority of world indices returned between -2.0% and +2.0%. Second, rotation of capital between equity market sectors appears to be accelerating with only 3 of the 11 main industry groups posting gains in the last week, led by Energy and Materials.

We also have started to see cracks in some of the areas which had previously benefitted from high investor confidence and risk appetite. Among the 8 main industry groups who fell last week were previous sector darlings like Information Technology, Communications Services, and Industrials. Also cryptocurrencies started to sell off and the Russell 2000 small cap index fell faster than its big cap counterparts.

The coming week is looking to be a busy one for economic and monetary news. Tomorrow brings US nonfarm payrolls, Canada jobs and North American wage inflation numbers, then next Wednesday-Thursday, consumer and producer prices for the US and China are due. Central bank meetings also start up again then with the Bank of Canada, Reserve Bank of New Zealand, and European Central Bank all releasing decisions and statements related to economic conditions and monetary policy trends.

As is somewhat expected in a positive business environment, confession season has been quiet so far except for news that Intel’s business of manufacturing chips for other companies is struggling. Earnings season kicks off next Friday with results due from three big US banks. Heading into earnings season, investors may note that prices, valuations and expectations are significantly higher than they were this time last quarter.

In this edition of Equity Leaders Weekly, we look at rising treasury yields and energy prices.

Over the last three years, since the CBOE Interest Rate 10-Year (TNX.I) bottomed out in the summer of 2021, treasury yields have been steadily trending upward. Over this period, upswings and downswings in the 10-year treasury note yield have coincided with moves in the opposite direction in equities and bonds.

For example, a downswing in the stock market from August to October of last year, coincided with a rally in TNX.I. Similarly a pullback in TNX.I in November-December coincided with a stock market rally.

Moving into 2024, the underlying uptrend of higher treasury yields has remained intact despite talk of interest rate cuts at some point. It would seem that bond traders have taken the talk of higher rates for longer more seriously than equity traders. In recent weeks, amid signs of a strong economy (no need to cut rates immediately) and signs of increasing inflation (increasing potential of future rate hikes), treasury yields have started to rise once again.

TNX.I recently broke out over 4.20%, completing a Double Top pattern and signaling the start of a new upswing. Next potential resistance appears near 4.63% based on a horizontal count, followed by the November peak near 5.00% also a big round number. Initial support appears near 4.00%, a round number and recent breakout point.

When talking about the cost of energy we usually look at the crude oil chart, but for consumers energy price swings tend to be seen more through refined products like gasoline and heating oil.

After soaring through 2021 and the first half of 2022, RBOB Gasoline (RB.F) staged a correction in the summer of 2022 and then settled into a sideways range between $2.00 and $3.00 per gallon that has persisted for the last 18 months.

Since support at the $2.00 channel bottom was successfully tested back in December, Gasoline has been on an upswing in 2024. In February, the current upswing started with a bullish Double Top breakout and has continued back up above $2.75/gallon for the first time since September, snapping out of a downtrend that had been in place since mid-2022.

Next potential resistance appears on the $3.00 to $3.10 zone where a round number, horizontal count and the August high cluster, followed by a previous high near $3.50. Initial support appears near $2.55 based on a 3-box reversal.

Traders should note that in addition to getting a boost from recent gains in the price of Crude Oil, Gasoline may also attract attention as the higher seasonal demand Summer Driving Season approaches.