Despite the continued stock market euphoria the US faces an increasingly difficult position.

February 8 (King World News) – Naveen Nair, Market Analyst at Citi:  US 10y yields: Yields are increasingly looking like they are settling into a range between 3.79% (December 27 and February 1 low) – 4.20% (Jan 19, January 25, February 5 high, double bottom neckline and psychological resistance).

Why it matters: Both support and resistance looks strong with two touchpoints at the support and resistance. Given the strength of both, we think we are likely to trade within the range in the short term.

10-Year US Yields Stuck In A Trading

But be careful of higher yields: Slow stochastics indicators on both the daily and weekly chart show modestly rising momentum. That leaves yields with a slight chance of a break higher – with subsequent resistance at 4.29% (December 11 high). We also look for any weekly break above the 4.2% handle, since that is the neckline for a double bottom formation that would suggest an extended rise in yields.

Technical indicators:

  • Two touch points at resistance and support, with both levels being strong: 3.79% (December 27 and February 1 low) – 4.20% (Jan 19, January 25, February 5 high, double bottom neckline and psychological resistance).
  • Uptick in momentum (slow stochastics)
  • Potential double bottom formation

US 2y yields: Yields have bounced off resistance at 4.48% (Jan high). While we also broke above the neckline of a double bottom formation at 4.42%, we note that we have not seen a weekly close above. For now, we think the range is 4.12% to 4.48%.

DXY: The dollar index has bounced off resistance 104.7 (May high, 61.8% Fibo), and ticked back below the December highs of 104.26. Main resistance continues at 104.7.

US Faces An Increasingly Difficult Position
Peter Boockvar:  
I keep hearing the word ‘sustained’ or something similar when it comes to what Fed members are looking for with regards to the pace of inflation. From Boston president Susan Collins, “Seeing sustained, broadening signs of progress should provide the necessary confidence I would need to begin a methodical adjustment to our policy stance.”

Mester last night said “It would be a mistake to move rates down too soon or too quickly without evidence that inflation was on a sustainable and timely path back to 2%.”

Kashkari echoed what Powell said that they aren’t looking for better inflation data from here, but “additional inflation data that is also at around this 2% level.” ‘Additional’ could equate to ‘sustainable’ here. 

And from Adriana Kugler, “At some point, the continued cooling of inflation and labor markets may make it appropriate to reduce the target range for the federal funds rate.” ‘Continued’ could equate to ‘sustainable’ here. She did add a caveat that “if progress on disinflation stalls, it may be appropriate to hold the target range steady at its current level for longer.”

Bottom Line
Bottom line, higher wages at these levels are good for consumers who are seeing moderating inflation but depending on the productivity of one’s business, I’ve heard countless times from earnings calls about the sticky labor cost situation even as other costs like raw materials have moderated and that of course could impact profit margins or pricing pass through of those costs or other costs will be contained or cut.

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