AFMC - The Stock Market Is Not Ready For 10-Year Treasury Rates Above 4%

Summary

• The economic data has been on the strong side lately.
• I don't think the Fed will hike rates by 50 bps in March.
• The fighting has intensified somewhat, and we are seeing pressure on both the euro and the ruble in the past two weeks.

Last week, Rick Santelli on live TV likened the Fed to a sick patient constantly popping pills at every sign of inflation. The patient does not feel well, pops another pill (i.e., another interest rate hike), and the next time the patient doesn't feel well, he pops another one. His conclusion is that the Fed is not allowing the pills to work and keeps popping them. The economic data has been on the strong side lately and, given a few inflation reports that came in hotter than expected, some market participants think the Fed will react with a 50-basis-point (bp) hike next time, hence the 2-year note - the most sensitive to Fed policy - made new cycle highs last Friday, above the high, we saw in November 2022.

Graphs are for illustrative and discussion purposes only. Please read the important disclosures at the end of this commentary.

While the 10-year note, at 3.95%, is less than 40 bps away from its November highs, it is only 5 bps below 4%, making that psychological barrier very important for the stock market. I don't think the Fed will hike rates by 50 bps in March, but I do think investors will worry plenty that they might, and they may stage an assault on the prior high in Treasury yields near 4.33% that will not go over well at the stock market.

Graphs are for illustrative and discussion purposes only. Please read the important disclosures at the end of this commentary.

The German 10-year bund closed Friday at 2.53%, a tick below its November highs, and it is likely headed higher as the ECB is behind in its monetary tightening and should hike rates by 50% bps a few more times. The German bunds above 3%, where I think they are headed, can pull Treasury yields above 4.33% via the famous Bund-Treasury spread. A couple more 25 bps rate hikes by the Fed and a couple more 50 bps rate hikes by the ECB likely mean new highs above 4.33% for the 10-year Treasury note.

Graphs are for illustrative and discussion purposes only. Please read the important disclosures at the end of this commentary.

While core PCE inflation came in hotter-than-expected at 4.7% last week (left-hand scale), it has most likely topped out due to ongoing quantitative tightening to the tune of $95 billion per month and the shrinkage of M2 month supply (year-over-year), which has never happened before in recorded history.

If the Fed stands pat, I think inflation will trend lower by the middle of 2023, should the war in Ukraine stays contained. No one is sure what will happen to global inflation if the war spills outside of Ukraine's borders, given unprecedented NATO support. The shelling must be really gruesome if both the Russians and the Ukrainians are running low on artillery ammunition. So far, we haven't seen much of a new offensive from the Russian military, which is important for stock market investors, as any major new invasion will move the prices of many currencies and commodities.

Graphs are for illustrative and discussion purposes only. Please read the important disclosures at the end of this commentary.

Still, the fighting has intensified somewhat, and we are seeing pressure on both the euro and the ruble in the past two weeks. If the fighting intensifies more, which is highly likely, in my opinion, we will likely see more pressure on both currencies. That puts parity in play for the euro, and who knows where the ruble will go? Targets for the euro below parity are in play if the fighting spills out of Ukraine, which I sincerely hope will not be the case, even though it remains a possibility.

Disclosure: *Navellier may hold securities in one or more investment strategies offered to its clients.

Disclaimer: Please click here for important disclosures located in the "About" section of the Navellier & Associates profile that accompany this article.

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