VIDEO: https://bit.ly/BlueChipDailyBondMarketResearch22325
THE BOND MARKET GOT THE MEMO A FEW WEEKS BEFORE THE STOCK MARKET DID
Although the S&P 500 index (SPX) and Nasdaq 100 Index (NDX) both made new record highs on Wednesday, they both pulled back sharply to end the week.
The key catalyst on Friday came from a series of weaker than forecast economic data points. Three key readings came in below forecast, and this clearly unsettled the markets:
- February S&P flash U.S. services PMI
- February consumer sentiment, and
- January existing home sales
One of the most telling signs came from the bond market.
10-year US Treasury Yields (TNX) closed down 8 basis points on the day, to 4.420. This is the lowest weekly close for 10-year yields since December 20, 2024, when TNX closed at 4.524. More importantly TNX yields are lower today than on February 12, when January CPI data came in high across the board on all four metrics. TNX closed up by 10-basis points February 12 (CPI day) at 4.637.
Traditionally, bond yields tend to rise on higher than forecast CPI data and inflation concerns.
The fact that bond yields have been trending lower since February 12 tells us that the bond market is much more concerned with economic growth than it is with higher inflation.
If bonds yields continue to trend lower, we would expect this to show up in the equity markets in two ways:
- Cyclical sectors, (industrials, consumer discretionary, financials and small caps), could show further weakness. Cyclical sectors, by definition, tend to move in tandem with economic data and expectations.
- Traditional defensive sectors, (consumer staples, utilities, real estate) should outperform and possibly the healthcare sector. These so-called defensive sectors tend to have more stable sales and earnings growth that is less tied to the overall economy. Regardless of the economic conditions, consumers will still buy soda and soap, pay their electricity bills and get their prescriptions filled. These defensive sectors also tend to pay above average dividends. When bond yields come down, the above average dividends become more attractive.
Key levels to watch for the 10-year UST yields are 4.40. If that level breaks decisively, 4.15 to 4.20 is the next technical target level.
If TNX continues to rollover, we would expect the above-mentioned defensive sectors to outperform.
- Utilities Select Sector SPDR Fund ETF (XLU)
- Real Estate Select Sector SPDR Fund ETF (XLRE)
- Consumer Staples Select Sector SPRD Fund ETF (XLP)
- Health Care Select Sector SPDR (XLV)
The January PCE (Personal Consumption Expenditures) inflation data is reported this Friday. If the data comes in above forecast, it could put upward pressure on bond yields. If it comes in flat to lower, we expect bond yields to soften.
Larry Tentarelli
Chief Technical Strategist and Founder
Blue Chip Daily Trend Report
Blue Chip Daily Trend Report
