Newsom's Market Rule #2 tells us: Let the market dictate your actions.
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Sometimes, though, the market gives us conflicting signs. Such is the case in US Treasury futures at the end of March.
The Barchart Brief: Your FREE insider update on the biggest news stories and investing trends, delivered midday The one clear indication is the market does not expect a rate cut by the US Federal Open Market Committee until at least the June 2025 meeting.
At the end of March, the Financials sector (US Treasury futures) within the commodity complex was giving mixed signals. This isn’t overly surprising given the continued state of “certain uncertainty”, reflected by the unchecked uptrend in gold (GCY00) as a safe-haven market. While some will make the argument the uptrend in gold also indicates a fear of inflation due to expanding US trade fights around the world, the commodity complex in general isn’t showing consistent gains. We’ll see, though, once the silliness of “Liberation Day” in the US has come and gone. We also know the next US Federal Open Market Committee (FOMC) meeting is scheduled for May 6 and 7 meaning more emphasis should be put on what Treasury markets are indicating.
Let’s start with the Fed fund futures forward curve. As of this writing, the April contract (ZQJ25) was priced at 95.67 putting the expected Fed fund rate at 4.33%, within the FOMC’s target range of 4.25% to 4.5%. The same can be said for the May contract priced at 95.705 (4.295%). It’s not until the June contract, priced Wednesday morning at 95.77, that we see the expected rate (4.23%) drop below the target range. This indicates the market is not expecting a rate cut until at least the 2-day meeting during June (ending on June 18). A lot can happen in the market between now and then. But for now, the market is not indicating a rate hike to battle the expected increase in inflation over the coming months and years.
We can see something similar on the long-term monthly chart for US 10-year T-notes (ZNM25). As I’ve talked about for a number of months, from a technical point of view the argument could be made for a continued uptrend. This pattern began at the close of November 2023 as the chart shows the completion of a bullish 2-month reversal[i], initially rallying to a high of 113-120 (December 2023) before eventually making its way to 115-070 during September 2024. But then things changed, and the market started to fall again, hitting a low of 107-060 during January 2025. What does all this mean? If the price of US Treasuries are trending up, then the market is expecting rate cuts to be seen. If Treasury prices are trending down, the general consensus is rate hikes are coming.
Fundamentally, we know what changed after September 2024. We can make the argument long-term investors moved from expectations of rate cuts to possible rate hikes. Technically, though, it seems important that the spot-month futures T-note futures contract DID NOT take out its previous low of 107-040 (April 2024) this past January. The same can’t be said for 30-year T-bonds (ZBM25) as this market’s January low of 110-19 was below the April 2024 mark of 112-27. Again, from a technical point of view, this would seem to be an important difference.
The key will be what happens next. If both the 10-year and 30-year markets see this rally fail as we get closer to the June FOMC meeting, then my interpretation would be the markets are thinking more about rate hikes. At that point, it will be interesting to see if Fed fund futures forward curve has changed.
Finally, what about the US dollar index ($DXY)? Theoretically, if interest rate cuts are coming, the greenback should continue to weaken. On the other, if rate hikes are on the horizon then the US dollar should firm against global currencies (unless other central banks are also forced to raise rates). As of the end of March there was no clear trend on the US dollar index’s long-term monthly chart. However, the March low of 103.10 took out the previous 4-month mark of 103.37 (November 2024), what could be viewed as a bearish momentum indicator. Does this mean global interests think the greenback is going to continue to weaken? If so, is it because of expected lower rates? Or is the global investment community losing faith in the United States due to official policy. All of the above is on the table in early April.
[i] This pattern consists of a close nearly the monthly low for month 1 before a rally during month 2 with a close near the monthly high. The pattern is discussed in John J. Murph’s “Technical Analysis of the Futures Market”, 1986 ed., pgs. 96-97.
