Long Bonds Approach Key Resistance: A Breakout Here Should Be Concerning

SUMMARY OF FED DECISION (Kobeissi Letter)

1. Fed leaves rates unchanged for 7th straight meeting
2. Officials raise 2024 inflation forecast from 2.4% to 2.6%
3. Median forecasts shows just 1 rate cut in 2024
4. Median forecast shows 100 bps of rate cuts in 2025
5. Fed says inflation has eased "but remains elevated"
6. Median 2024 Core PCE inflation estimate up from 2.6% to 2.8%

The Bottom Line

1. The market remains divided with small caps versus growth stocks
2. Gold and silver sold off some from their highs, but closed higher
3. We saw more calls for a market top coming soon
4. The long bonds (chart) above continue to hold the key on risk off/on

On June 3rd, the Daily covered the long bonds.

Here are the thoughts-answers from June 3rd in bold, answers today in red bold:

Monetary Policy: In the June FED meeting, when the Fed signals a shift toward lower interest rates, bond prices tend to rise-are they getting ready to do a June cut?

They did not cut and may not cut until after the election-that is a good thing for confidence in the economy

Economic Conditions: A moderating economy, dovish central bank discourse, and forecasts for milder GDP growth can all contribute to bond rallies. At the end of this week, we will see the updated non farms payroll number-is unemployment increasing?

Jobs number was strong, but nuanced-Fed says economy strong

Inflation Expectations: If inflation remains subdued, bond markets anticipate progress, leading to rallies-PCE last week came in with some areas of inflation subdued.

CPI comes in flat-not enough for the Fed to cheer-as not near their target, but they hinted they could lower if inflation falls further

Supply and Demand: When demand for bonds exceeds supply (more buyers than sellers), bond prices rally. China has been selling US bonds-are they done?

Seems like China paused-and could go back to selling-yet the demand from recent auctions in the US are better

Hence, the Gordian Knot is yet to be untied (Monday’s Daily).

And the long bonds rallied right to the 50-week moving average and stopped.

If TLT clears, note the Leadership chart. We would be concerned if TLT begins to outperform SPY.

ETF Summary

• S&P 500 (SPY) 545 is a good target-but no signs of a reversal yet
• Russell 2000 (IWM) Cleared the 50-DMA but needs to hold 201
• Dow (DIA) 40k resistance and also an interesting turn to red
• Nasdaq (QQQ) All-time highs which still hard to argue with
• Regional banks (KRE) Watching the range 45-50 CAREFULLY
• Semiconductors (SMH) Unless this breaks 250-strong and on ATHs
• Transportation (IYT) 63.80 area now important support with 66-67 the area to clear for health
• Biotechnology (IBB) 135 support 140 resistance-big eyes here this week
• Retail (XRT) 75-80 trading range to break
• iShares iBoxx Hi Yd Cor Bond ETF (HYG) Looks better-yet still in a range until it clears 78

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Written By: Michele Schneider