Stocks Slip as Late Selling Weighs on Indexes, As Inflation Expectations Rise
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The stock market finished the day mostly lower, although the S&P 500 was relatively unchanged, down just 43 bps, with most of it coming in the final minutes of the day. There was about $1.1 billion for sale in the S&P 500 in the final 10 minutes, which isn't a large amount, but on a day that saw the S&P 500 futures barely fail to trade 900,000 contracts, it was enough.
The pattern in the S&P 500 suggests the index may give back Friday’s gains. Typically, these sharp, straight-line rallies act like gaps, which tend to “fill” and revisit their starting point. If that happens, it won’t be surprising.
One-year inflation swaps also moved higher on the day, reaching 3.36%. We’ll see what happens, but inflation swaps continue to point to higher inflation ahead. I find it hard to believe that if inflation expectations keep rising, Treasury yields won’t follow.
At this point, we’ve seen very little movement on the long end of the curve. Even with the 30-year rate rising 2 bps on the day, it wasn’t enough to push the 30-year minus 3-month spread through resistance.
In addition, there is a global trend of higher interest rates; both the ECB and the Bank of England have cut rates at the front end of the yield curve. However, the German 10-year has climbed to almost 2.75%, while the British 30-year has risen to 5.55%. Generally, both countries share the same backdrop of increased government spending. This is yet another reason why we could see 10- and 30-year Treasury yields rise in the US, even if the Fed cuts.
Meanwhile, the dollar index continues to show strength, ripping higher and regaining most of what was lost on Friday. Every time the dollar looks ready to break down, it manages to hold the key support levels needed to prevent it. The overall trend in the dollar remains bullish.
-Mike
Terms by ChatGPT
Glossary
Basis Points (bps) – A unit equal to one hundredth of a percentage point, commonly used to measure interest rate changes.
Dollar Index (DXY) – A measure of the value of the US dollar relative to a basket of major foreign currencies.
ECB (European Central Bank) – The central bank responsible for monetary policy in the Eurozone.
Gap Fill – A technical analysis concept where an asset’s price retraces to cover a sharp, one-directional move.
Inflation Swaps – Derivative contracts where two parties exchange fixed payments for floating payments linked to inflation rates.
Labor Day Holiday – A US federal holiday marking the first Monday in September, often associated with lower market activity.
Resistance – A price level at which an asset struggles to move higher due to selling pressure.
Spread (Yield Curve Spread) – The difference between yields on two different maturities of bonds, used to gauge market expectations.
Treasury Yields – The return on US government bonds, reflecting borrowing costs and investor demand.
Yield Curve – A graph plotting bond yields across different maturities, often used to assess economic outlook.
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