US Interest Rates Heading Higher?

The S&P500 closed almost unchanged last week. Actually, it declined by 0.01%, but essentially it went nowhere. Volume was very light and volatility also remained relatively unchanged–the VIX index remained in the mid-teens, close to where it closed the prior week.

In US macro news, existing home sales, new home sales, consumer confidence, headline durable goods orders, and the estimate for 1st quarter GDP all beat their respective estimates. On the downside, the Chicago Fed national activity index, the Richmond Fed manufacturing index, and core durable goods orders all missed their respective estimates. And the Fed’s balance sheet decreased by the largest amount in several weeks—$13 billion.

The technical picture, for the S&P500, remains the same. The daily charts are bullish and the weekly charts are bearish. So it would be no surprise if the S&P crept higher over the next several trading days. That said, the technical damage done in early February and in late March has not been reversed on the weekly charts. This means that longer term traders and investors should remain cautious. That said, our Simple Rule which utilizes an even longer time frame remains bullish for the S&P index as a whole. Last week’s minuscule loss did nothing to change this reading.

Finally, one of the big market stories last week involved interest rates. For the first time since 2014, the yield on the US 10 year Treasury rate rose above 3%. Many traders and market analysts have warned that the 3% level was a kind of line-in-the-sand, that if crossed, would cause equity investors to get worried and to start selling. Well the barrier was most definitely crossed mid-week but no equity market panic ensued. Does this mean that rising rates don’t matter to equity markets? Most likely the answer is that they do matter, but that the 3% level is still simply not high enough to do damage to the US equity markets. Apparently that danger level is much higher. So until, or if, these unknown higher rates are reached, US stocks may not have to worry about the 3% yield on the US 10 year. This doesn’t mean that the coast is clear for near-term price rises in the S&P, but it does mean that 3% on the 10 year may not be the “trigger” for market panic, panic that, many experts predicted would happen with a 3% 10 year Treasury.

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