The markets were flat ahead of this week’s inflation data and tomorrow’s employment benchmark revisions, which are due at 10 AM. The PPI report comes Wednesday, followed by CPI on Thursday. In addition, there will be 3-, 10-, and 30-year Treasury auctions this week, setting up significant settlement dates next week. As of now, September 15 is set to settle for $78 billion.
SOFR rose to 4.42%, which is a relatively high level for this time of the month and signals a lack of liquidity in the funding markets. So far, the Standing Repo Facility hasn’t been triggered, which suggests that while liquidity remains sufficient, it is becoming tighter and more expensive to borrow.
It isn’t likely to improve much tomorrow either, since today the overnight general collateral rate averaged around 4.44% for the second day in a row. As a result, SOFR may remain unchanged or even tick up to 4.43% or 4.44%.
So far, liquidity hasn’t impacted the broader market, but parts of it have stalled. The semiconductor SMH ETF is one example, having consolidated since mid-July. Its RSI has been trending lower, suggesting a shift in momentum. It’s possible to identify a diamond reversal top pattern forming, though these patterns are tricky, as they can also represent bullish consolidation.
It may not even be Nvidia that determines the sector’s direction—it could come down to Broadcom. The stock is trading two full bars above its upper Bollinger Bands, with an RSI above 75. It’s rare to see a stock this far above the bands and with such a high RSI at the same time. In the past, this has suggested that Broadcom may either pull back or at least consolidate sideways. More often than not, it has resulted in a pullback.
30-year Treasury yields fell for a third straight day, closing at 4.69%. This is a concern because it appears the symmetrical triangle has broken lower, with a decisive close below support at 4.8%. That breakdown could point to a move toward roughly 4.3%.
The problem is that inflation expectations haven’t really come down. One- and two-year swaps are lower, but only slightly. Even the five-year swap is trading at 2.55%, which remains above the breakout level of 2.53%.
The next few days of data will be very telling, that’s for sure.
-Mike
Glossary by ChatGPT
Glossary
Bollinger Bands – A Technical Analysis Tool Using Standard Deviation Bands Above And Below A Moving Average To Measure Volatility And Potential Overbought Or Oversold Conditions.
Diamond Reversal Top – A Rare Chart Pattern That Signals Potential Trend Reversal, Though It Can Sometimes Indicate Consolidation Instead.
Employment Benchmark Revisions – Adjustments Made To Official Employment Data To Reflect More Accurate Figures, Typically Released Annually By The Bureau Of Labor Statistics.
General Collateral Rate – The Interest Rate On Overnight Repurchase Agreements Backed By The Most Liquid And Low-Risk Securities, Often Used As A Benchmark For Funding Costs.
PPI (Producer Price Index) – A Measure Of Wholesale Inflation That Tracks Changes In The Prices Producers Receive For Goods And Services.
RSI (Relative Strength Index) – A Momentum Oscillator That Measures The Speed And Change Of Price Movements, Often Used To Identify Overbought Or Oversold Conditions.
SOFR (Secured Overnight Financing Rate) – A Benchmark Interest Rate For Overnight Borrowing Collateralized By U.S. Treasury Securities, Widely Used As A Reference For Financial Contracts.
Standing Repo Facility – A Federal Reserve Tool That Provides Liquidity To Financial Markets By Offering Overnight Loans Against Treasury Collateral.
Swaps – Derivative Contracts Where Two Parties Exchange Cash Flows, Often Used To Hedge Or Speculate On Interest Rate Or Inflation Expectations.
Symmetrical Triangle – A Chart Pattern Formed By Converging Trendlines That Typically Signals A Continuation Of The Existing Trend Once Broken.
Treasury Auctions – The Process By Which The U.S. Treasury Issues Government Debt Securities To Investors, With Varying Maturities Such As 3-, 10-, And 30-Year Bonds.
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I misread the Job report revisions; the -598k was for 2024, not the estimate.