THE MACRO SETUP OVERVIEW:
- US equities sell-off finally arrives amid a perfect storm for risk aversion
- Will China’s Evergrande contagion be contained for the foreseeable future?
- The US Dollar continues to follow Fed hike odds, US Treasury yield curve shifts
Yields Up, Stocks Down
In this week’s edition of The Macro Setup, featuring Dan Nathan and Guy Adami, we talked about why the decline across US stock markets is coinciding with the uptick in US Treasury yields, which have spilled over into a stronger US Dollar following the September Federal Reserve meeting.
When US Treasury yields rise, there are usually a few factors that can be identified: shifts in Fed policy; rising inflation expectations; and/or improved growth expectations. This time around, it doesn’t seem like the third factor is in play: the Atlanta Fed GDPNow 3Q’21 growth tracker is at its lowest level of the quarter, sitting at +2.3% annualized.
Instead, with rates markets discounting four 25-bps rate hikes through the end of 2023 and the US Treasury yield curve moving in a manner consistent with what happened in 2014 – the last time markets were honed in on the Fed tapering asset purchases – it very much seems that changing monetary policy is a prime culprit.
But the inflation narrative is making a strong case as well. The CRB commodity index has surged higher over the past two weeks, thanks to the surge in energy prices – crude oil, brent oil, natural gas – as the supply-demand imbalance persists amid elevated supply chain concerns globally.
While atypical historically speaking, it’s possible that the recent dynamic of a stronger US Dollar and higher energy prices remains for the foreseeable future. Crude oil prices are breaking out to multi-year highs, while the US Dollar (via the DXY Index) is seeing gains against all major currencies: EUR/USD has broken to fresh yearly lows, as has GBP/USD; and USD/JPY recently surged to its highest level since February 2020.
CHARTS OF THE WEEK
Eurodollar Futures Contract Spread (September 2021-DECEMBER 2023) [BLUE], US 2s5s10s Butterfly [ORANGE], DXY Index [WHITE]: Daily Rate Chart (January 2021 to October 2021) (Chart 1)
GOLD PRICE TECHNICAL ANALYSIS: DAILY CHART (JULY 2020 TO OCTOBER 2021) (CHART 2)
EUR/USD PRICE TECHNICAL ANALYSIS: DAILY CHART (MARCH 2020 TO OCTOBER 2021) (CHART 3)
— Written by Christopher Vecchio, CFA, Senior Strategist