The dollar has taken investors on a wild ride since the onset of the COVID-19 pandemic lockdowns in March 2020 when the index peaked around 103, to now where the index is trading around 104. The road from then to now, however, saw a near 30% rally from the lows of early 2021 to the highs of fall 2022. While all of 2023 and so far into 2024 the index has been confined to a narrow range, with one notable attempt to break-out last fall. The reasoning behind the movements in the dollar has evolved with the economic cycle, or at least where market participants perceive the economy to be on the economic cycle.

Interest rates, proxied by the US 10-year treasury for simplicity, have sustained a clearer trend than the one seen in the dollar. From the start of the pandemic to now interest rates have moved in one general direction, and that is up. We’ve seen three periods of consolidation so far where some investors began speculating that rates were peaking, just to see a further sell-off in bonds and interest rates drift higher. Much of 2022 was spent with stocks and bonds moving in the same direction, as the Fed commenced its monetary policy tightening cycle. The longstanding 60/40 portfolio model broke down, and the yield curve began to flatten and eventually invert.

Stocks, proxied by the S&P500 for simplicity, also sustained a clearer trend than the one seen in the dollar, with just two notable periods of retracement, which have both since been surpassed. Spring of 2020 at the onset of the pandemic, which was surpassed that summer, and most of 2022 while the Fed was well into its rate hiking cycle, which was eventually surpassed last month (January 2024). From a technical standpoint, stocks are breaking out of a continuation pattern, meaning that the market is attempting to do more of what it’s been doing. Now that we have an idea of where the price of stocks in general might be headed, let’s come up with a narrative keeping in mind that the simpler the better.

The lions share of US stock market returns where generated by 5 to 7 tech companies in the last couple of years, both on the way up and on the way down. They dragged down the market when the Fed was raising interest rates because their future cashflows were more heavily discounted as well as some of their dependency on capital markets. Then with the introduction of Artificial Intelligence (AI) software and its rapid proliferation, the tech companies at the forefront of this technological rollout are once again dragging markets higher. There are suddenly innumerable opportunities for subtle increases in productivity across the US economy and eventually the rest of the world, which suggests that businesses large, medium, and small can be efficient and profitable even with higher costs of capital are represented by general interest rate levels.

The forecast for interest rates has been a hotly contested topic since we started experiencing rapidly rising inflation around the globe because of the COVID related supply chain and labor market disruptions. The direction has been clear (higher rates), but the destination (what level), and duration (how long) has always been contended. My interpretation of the inverted yield curve is not necessarily forecasting an economic recession, but more so a financial market recession, which we have already experienced and are well on the way to recovery and by some estimations a new expansion. A normalizing of the yield curve signals a positive term structure and a growing economy, or at minimum expanding markets for risk assets like stocks and real estate.

Considering where unemployment levels currently are in the US, as well as the restructuring that is underway with global supply chains there is enough structural pressure to keep inflation hovering about the Fed’s target to stay the committee’s hand on cutting rates too much or too quickly. But if we are to expect...

The US 10-Year Treasury rolled over mid-summer 2020, and has been trending lower ever since. Meanwhile, most other markets that I follow, have spent considerable amounts of time in some level of flux, with no clear sense of direction with the price action. Gold and the Dollar have been standouts, as they have both had periods of high correlation (positive for gold vs negative for the dollar) with the US10YR. With its decisive move lower, the 10-year treasury is delivering on a promise by the Fed to fight inflation the best way they know how. The second part of the Fed's promise however, higher rates for longer, is still yet to be determined.

Orthodox macroeconomics suggests that monetary policy tightening as rapidly as it did, should have at minimum exposed deep fault lines in financial markets, and at most caused some kind of market calamity. We saw cracks this spring but no fault lines, when three poorly managed banks went out of business in rapid succession. Since then rates have moved higher at every point along the yield curve without much commotion. Some market participants suggest this means the Fed might actually accomplish what is now dubbed a 'no landing', wherein they can coax inflation back down to their target of 2% without causing a significant increase in unemployment. As romantic as that scenario sounds, it most likely has the lowest probability of occurring because it ignores the stochastic nature of disruptive market shocks.

A more likely outcome has some subtlety to it. As promised by the Fed, rates on the front end of the yield curve will remain elevated, barring some sudden and rapid rise in unemployment. The middle and back end of the curve however, which are manipulated by market forces, will continue to drift higher as the bonds are sold off. US rates are currently sitting at or around 5% across the curve, and as long as inflation remains above the Fed's target and the US consumer has a job and access to credit, there is room for potentially more monetary policy tightening. The omnipresence of inflation in the hearts and minds of Fed members and market participants alike is currently being reflected in the bear steepening of the yield curve.

The evolving outlook for the term structure of US rates suggests that, short-term yields may remain elevated which in-turn means that medium and long-term yields will experience upward pressure as well. If the resilient consumer can keep borrowing despite rising interest rates and the change in the unemployment rate indeed remains subdued, then there is a scenario albeit with a low probability wherein the yield curve can eventually reflect a positive term premia. This for all intents and purposes will be the market manifestation of the ever elusive 'soft landing'. Enter a world where the economy adjusts to higher rates, the yield curve steepens, and the inverse relationship between stocks and bonds that make the 60/40 model portfolio work re-exerts itself.

The last 18 months have been a rollercoaster ride across financial markets, but in the grand scheme of things markets really haven't gone very far, and in most cases sideways ranges have emerged as a result of all the volatility. In the world of Technical Analysis, this type of price action creates a Rectangle Chart Pattern. This type of consolidation can occur at the end of a trending market, when buyers and sellers get to a point of indecision. Past the point of indecision, a breakout of the range in one direction or the other signifies a continuation of the previous trend, or a possible reversal.

The dollar rocketed higher while the Fed raised short-term rates by 75 bps for most of 2022 and into 2023. The dollar index reversed course as the Fed down-shifted from 75 bps rate hikes to 50 bps, which then consolidated into the lower-bound of the rectangle pattern. Now, as the narrative of a 'soft landing' for the US economy becomes more commonplace among some market participants, the dollar appears to be moving from the bottom of its rectangle towards the top. This repricing of the dollar reflects falling inflation in the US paired with a resilient labor market. The dollar can be expected to continue to rally, if inflation stalls-out before getting back to the Fed's 2% target and unemployment remains subdued. This leaves the door open for the Fed at any point to surprise markets with some type of policy tightening.

The market for Gold has been consolidating for the longest of all the markets I follow. The rectangle chart pattern starting forming in late 2020 for gold, and has been very well defined. Within the last 18 months, gold and the US 10 Year Treasury spent a considerable amount of time trading with a strong positive correlation, especially once the Fed embarked on the current rate hiking cycle. From its current level, gold can be expected trend lower as rates remain elevated and central banks keep downward pressure on inflation. In this environment, gold loses luster as an inflation hedge and as the opportunity cost of higher yields cumulate.

The US 10 Year Treasury market is at the point of breaking out of the rectangle chart pattern, but the trade setup suggests higher interest rates are on the horizon. The downtrend in price leading to the rectangle chart pattern was made up to two Bull Flag Patterns, so a breakdown of the rectangle could mean a return of downside momentum in fixed income markets. The strong positive correlation shared by Gold and the US10YR also suggest that the government bond market may experience selling pressure in the near-term, as Gold charts are also signaling selling pressure in the near-term.

The Oil market is always an interesting one to follow. A lot can be inferred from the price of oil about industrial activity globally, when adjusted for geopolitics. And if nothing else, the volatility can make your head spin. The market trended up from the lows of the COVID lockdowns when Russia and Saudi Arabia dumped oil on the market to bankrupt US shale producers, to the highs made post the Russian invasion of Ukraine. Then the market became concerned about the outlook for the Chinese economy and the Biden administration opened the taps on the US Strategic Petroleum Reserve so prices retraced. This setup the Rectangle Chart Pattern when the market started rebounding on news of Saudi and Russian production cuts and subsequent extensions of those cuts.

At current levels of consumer and industrial demand for energy, the production cuts planned by OPEC+ will continue to build a shortage into the near-term. Consumer spending in Europe is most likely the linchpin maintaining upward pressure on oil however. If Europe continues to slow, so will demand for Chinese exports and Chinese industrial demand for energy, which can take some steam out of the move higher in oil.

The equity market, proxied by the SP500 rocketed higher from the lows ...