 Hey everyone, this is Mike Kramer of my capital the weekly check-in today is August 22nd, and it's around eight o'clock New York time US markets are closed So there's gonna be a lot of to cover today. There's a lot of parts of the market that are now Really starting to work together in a way that we could see These things really shape where equity prices go and it really starts at the top With the yields on the US yield curve, and then it kind of flows into Currencies and then currency movements ultimately affecting equity prices and if we just start with at the top with the two year The two years been sort of not really committal at this point It's it's been stuck between basically four and three quarters and five percent going all the way back now to this point The middle of June and a lot of this is because the market is undecided in terms of what the next path is for the Fed And we will get it from one standpoint the market is basically looking at a 50% chance for the Fed to raise rates one more time potentially in November and Actually, these odds have sort of increased over the last couple of days and weeks If we just take a look we can see that basically since August 21st the odds of another rate hike have increased from about call it 36 percent to almost 50 percent and What Jay Powell says this Friday at Jackson Hole could have a lot of influence in terms of where this number goes But what perhaps is even more important is what's happening in Fed fund futures when we go further out in time When we look at Fed fund futures for December of 2024 This is starting to move up to around four and a half percent. Why is this important? Well the Fed basically If they're less SAP in June noted that they saw a Fed fund rate next year at around 4.6 percent So what you're seeing is the market is actually beginning to move up towards where the Fed target is and when we look at where The December Fed fund futures you can see we're up at 5.45 percent Again moving towards that 5.6 percent target that the Fed has laid out for 2023 So when you look at it from a standpoint of you know The where the market is versus where the Fed is as of the June SEP the market is moving closer to where the Fed is in terms of how it's thinking about things And that's one of the reasons why we're beginning to slowly see the two-year rate begin to creep higher And you know, this is important because basically we're getting to a point where the we're getting back to the March 8th Highs now March 8th obviously the date that goes back to SVB and the and the and some of the banks that ended up failing first Republic And essentially what we're also seeing now at this point is the yield curve in the back of the curve Really beginning to move higher. In fact, I have this little bit of a messy chart But if we just take away some of these lines and we take a look we can see we've already eclipsed the October 24th highs and what we have here is really what looks to be a bull flag pattern And so I've broken it down from a standpoint of you know How high can the 10-year go just basically on it on a on a Technical basis and when we just very conservatively speaking if this were the flagpole and this was the flag And if we measured it from the low point to the breakout We're talking about a move to around 5.1% now if you do it technically the correct Measurements where you would take the measure of the flagpole and you would measure it from the actual breakout point You're talking about the potential of a rally in the rate in the 10-year rate to around 5.7% Again how you want to count this completely up to yourself But if you wanted to start including you know this origin point as another place to start the move higher in rates It's certainly viable although again if we're just kind of taking things step-by-step day-by-day I like to try to look at things more conservatively now. Why is this important? Because basically you have the front of the curve, which has been really kind of stuck On the two-year rate around this 5% level while you're seeing the back of the curve Really beginning to rise in a rapid manner and this has the yield curve essentially at this point beginning to show signs of re-steepening and this is important because Essentially what the market is doing at this point is that this is a re-steepening in the typical fashion sense of you know the Fed of the market Anticipating Fed rate cuts and the two-year is falling to the 10. This is a bear steepener And basically what's happening is you're getting the 10-year arise to the 2 And this is more of an indication of the market thinking about future growth future inflation Expectations going forward and this is really visible when you start looking at the yield curve of The tip market when you look at the 10-year tip. What we're basically seeing at this point is a 10-year tip That's now up to 1.97% This is a new series high and if we go back over time You'll see that this is a number that we haven't seen in at least five years and if we go back even further This is a number that we haven't seen Basically since 2009 so nearly a decade So we're talking about monetary policy in real terms getting tighter at around that 2% level And what's and what we essentially have at this point is basically the entire inflation tip curve trading at basically 2% or higher at this point in time and Why is this important because we're seeing rates at the back of the curve moving higher in nominal terms And we're seeing rates more broadly at the back of the curve also rising in real terms And this is telling us really about what the market is thinking about inflation and what it's showing us is that The market is readjusting Basically at this point on the back of the curve not because it necessarily Thinks that you know growth is going to be you know stronger in the US economy But it almost appears as if the market is saying that it expects inflation to remain elevated for a longer period of time and I'm coming to that conclusion basically by looking at the break-even inflation expectation for the 10-year and Again, what we see here is that the break-even inflation expectation for the 10-year is basically around 2.33 percent Which is off the recent lows and really more towards the middle of the game Higher than where we were prior to 2018 and What this is sort of telling us again is that the market is basically saying we may be in an environment where we need to have Nominal rates higher to be able to get real rates to where they have to be Based off of where inflation expectations are and this is important because what this what's basically happening at this point Is you're beginning to see spreads between us and 10-year German bonds begin to really widen again and move up towards The upper end of the range when you look at the US 10-year and you subtract the Japanese 10-year can see that's also beginning to widen Again, why is this important? It's important because basically you have the tech the Japanese the Japanese yen basically trading against the dollar almost entirely based on where these where these Interest rate their differentials are going at this point and if we can expect to see nominal rates rise quicker here Then where they're maybe going to rise let's say in Japan where yes They're you know in the process of lifting yield curve control and yes the Japanese 10-year JGB is trading at the highest level. It's been now basically since 2014 at 66 basis points It still seems more likely that you're going to see rates on the US side of the equation continue to rise a little bit more aggressively just because they have more that freedom to do that and The more that the rate in the 10-year in Japan rises the more it sort of sets a higher floor for the rest of the world and So what you're basically seeing at this point is a US dollar That's you know showing signs of of strengthening against the Japanese yen getting back to where it was Basically in October of 2022 and potentially, you know testing some of these upper levels the yen trading back up to around 184 13 because essentially you're at resistance right now at once 46 and a quarter So a move over 146 and a quarter potentially sets up a move to even higher levels Maybe around 148 likewise Resit supports really kind of limited here at 144 83 So downside is likely limited compared to what the upside move is when you look at the euro you're also seeing the dollar strengthen against the euro and More importantly, you're basically at this point sitting right on support This is your floor basically at 108 and a half and if you were to drop below 108 a half It really opens the path down to 106 90 or so likewise If you're able to break this little trend line that's forming it in place at this point You're talking about more of a likelihood of a move back up towards this 109 region I think at this point the downside risk is certainly outweigh the even with the British pound versus the dollar You can see that we've been able to you know break this downtrend We haven't really surpassed as low or bound at 126 or so But at the same time all we're doing at this point is consolidating sideways almost like We're waiting for a little bit of a of a decision here out of the market in terms of what really wants to come next In terms of the British pound with resistance being around 128 and resist and support being around 126 90 And when we take it over to the dollar index You can see that basically because we have these scenarios where the dollar strengthening versus the euro the dollar strengthening against the yen and also very importantly the dollar strengthening against the Chinese one That basically is setting up a scenario where you're seeing the dollar index potentially break above a meaningful level of support Resistance here around 103 and a half and once we clear this 103 and a half region There's not much to stop us going from 104 and then 104 75 or so and then really onto bigger numbers at 105 and a half And potentially well beyond even that and this is important because you know What do we get when we get all of a sudden you're going to get rates on the back of the curve moving higher You're going to get the dollar potentially strengthening. Well, that's going to lead to tighter financial conditions And and so again today what sort of happened in the market here in the u.s You know we gapped higher to start the day And then by day's end we finished the day You know on basically near the lows down 28 basis points And so if you start getting into a situation where the dollar is going to continue to strengthen from here You're going to see more S&P 500 weakness because at the end of the day all we've been doing You know for the last call it two years is just trading in a in a relationship That's inverted to one another and there you can see the relationship between the two So if you continue to see the dollar strengthen, that's going to continue to weigh on s and p 500 And essentially at this point we're talking about an s and p 500 that's Getting pretty close to potentially breaking to even lower levels This is really your big support level here around 43 40 Once you break 43 40 it's on to you know 42 70 and then you're talking about 41 60 And really to the upside again, we tried to break out today. We tried to break higher We tried to get above these resistance levels over here We gapped above it. We weren't able to hold it. We failed and that's a pretty bearish indicator In fact closing on the lows is pretty bearish as well So if you get a gap down tomorrow below this 43 80 area, you're talking about going easily I think back to 43 60 Likewise, if you can take this high out of 4400 Maybe you get a second shot at 44 20, you know, but if you look at the Dow I think the story becomes a little bit more ominous because Again when we looked at the Dow a couple weeks ago We were talking about this big level of resistance that goes back many many months november of 22 At basically 34,600 We got above it and we came all the way back below it And it's been now one two three days that we haven't been able to get back above it And that's an important level because not only did we not get back above it You can see we've attempted to get back above it two prior times and you got a lower high each time That's really sort of a bearish indicator to me And what suggests here is that if you go below 34,000 You know 250 tomorrow and get below this 34,200 level You're talking about getting back into the mid 33 thousands And I think that's really a negative sign for the Dow Jones as well And if we look at the NASDAQ finally The NASDAQ obviously has Nvidia earnings Um, and obviously that's going to be big for the whole market But again, you can see that we broke this big major uptrend and that's really setting us up for Potentially retesting this lower trend line Again, just like the S&P if you take out this high early tomorrow 15,041 You're talking about, you know, maybe trying to get back up to this 15,200 level If you break this 14,880 region, you're talking about filling a gap Probably down to 14,700 or so. So again, lots of things going on in the marketplace I think at this point the dollar probably matters more than anything else That's happening in the market if the dollar's continuing to rise If you're seeing rates at the back of the curve beginning continuing to go higher I think that's going to be a really hostile environment for stocks going forward And I think anytime you start seeing the dollar strengthen Against the euro strengthening against the yen strengthening against the won even strengthening against the canadian dollar It really makes it really makes it tough. I think for stocks to rally in that type of environment So keep an eye on that DXY and let that sort of be your guide. Anyway, have a great rest of your week and I'll see you soon. Bye