- While the US Fed paused its interest rate hikes in June, the key takeaway was two more increases could yet be seen during 2023.
- Markets are at an interesting stage of the normal business cycle, with all three major sectors (bonds, stocks, and commodities) showing some degree of long-term uptrends.
- Meanwhile, the US dollar index still looks to be trending down, meaning traders aren't overly concerned about possible rate hikes to come.
It was no surprise the US Federal Open Market Committee concluded its 2-day June meeting by leaving the Fed fund rate unchanged. At least to those who keep track of Chairman Powell’s comments between official meetings and the comments of various Fed Presidents. This time around Mr. Powell gave plenty of notice the Fed could pause rate hikes this month, which it did, ending a run of 10 consecutive increases. However, the comments from others that the US should expect additional hikes still rings true as part of the announcement talked about a possible two more increases in 2023 with a rate target between 5.5% and 5.75%. I had to laugh as traders overreacted to the announcement with the Dow Jones Industrial Average ($DOWI) initially falling almost 430 points before trimming its loss. When the closing bell rang, and the inane clapping had died out, the DJIA was down ‘only’ 233 points (0.7%) while the Nasdaq finished 53 points (0.4%) higher and the S&P 500 added almost 4 points.
Where does this leave markets in the grand scheme of things? As I’ve talked about before, there is a basic business cycle markets tend to follow[i]:
- Bonds turn up (stocks and commodities falling)
- Stocks turn up (bonds rising, commodities falling)
- Commodities turn up (all three markets rising)
- Bonds turn down (stocks and commodities rising)
- Stocks turn down (bonds dropping, commodities rising)
- Commodities turn down (all three markets dropping)
Given there are no absolutes when it comes to markets, there can be some variability in the order in which they turn. Additionally, from an investment and cyclical point of view I like to look at long-term monthly charts, setting the Goldilocks Principle[ii] aside for the time being.
This is what my study of monthly charts shows:
- All three major US stock indexes completed bullish reversal patterns during October 2022 indicating long-term trends had turned up
- The US 30-year T-bond (ZBU23) completed a bullish 2-month reversal during November 2022 indicating the market’s long-term trend had turned up.
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The commodity complex is vast, with the softs sector seeing markets taking turns rallying to new highs. However, if we focus on the three Kings of Commodities we see:
- WTI Crude (CLN23) oil hit a new 4-month high during April, usually a clear sign its long-term trend has turned up. However, May saw the spot-month contract post a new 4-month low.
- The monthly chart for a gold cash index (GCY00) completed a bullish key reversal during November 2022 (the same time as 30-year T-bonds) with the uptrend recently stalling out near $2,060, creating what looks to be a triple-top.
- The Barchart National Corn Price Index (ZCPAUS.CM) completed a bullish spike reversal during May
In a nutshell, then, it looks like all three market sectors (bonds, stocks, and commodities) are in long-term uptrends as of this writing.
Do I think the June pause in interest rate hikes by the US Fed changes anything? No. For now the US dollar index ($DXY) remains in a long-term downtrend with support at the double-bottom low of 100.82 (February 2023) and 100.79 (April 2023). Given monthly stochastics have not moved below the oversold level of 20%, the index looks to have time and space to move lower regardless of what the Fed’s next move is. As of this writing the index was sitting near 103.00.
As for the stated Fed fund rate range of 5.5% to 5.75%, the futures forward curve is indicating a 5.25% might be as high as the increases go, with the October contract priced at 94.73 (5.27%). These prices will change, of course, which just adds another layer of fun to intermarket analysis.
[i] From the book “Intermarket Technical Analysis” by John. J. Murphy, 1991 edition.
[ii] The Goldilocks Principle says, “Daily charts are too hot, monthly charts are too cold, but weekly charts are just right.”
On the date of publication, Darin Newsom did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
