Rethinking My Yield Call

CLUB/EDGE client post. Focus on US 10Y yield price target; oil & yen carry trade.

» CLUB/EDGE client post Wednesday June 19th, 12:08 PM.

In Support of my “Warm Summer Housing Market Call”…

US Mortgage Rates Drop Below 7% for First Time Since March

And with that, I would like to update my 10 year yield price target.

I had previously said in March I saw it dropping from 4.688% down to 4.2%. We are clearly there.

I now see a strong indication that we will break below into 4.0% 10Y by the end of the summer.

At first glance this looks bullish equities, and yet I have a few concerns/predictions to consider.

As my call for 10Y2Y yield curve inverts more deeply (-60 at least), I see a case where:

1. USD strength could emerge (would support my precious metal pullback warning).

2. Fed tries to talk down the rising USD with “more accommodation”.

3. Banks start to roll over - earnings 7/17 - as jobless claims increase with unemployment rate pushing higher.

4. FOMC 7/31 seriously considers rate cut. (Don’t @ me; it is a growing potential as YC inverts.) They may even pop in for one in August before UE hits 4.2%.

5. Equities see some volatility once 10Y breaks below 4.2%, but not outsized volatility until UE breaks above 4.2%. And we know Fed/Treasury will accommodate before that happens. It is an election year after all!

Bonus Prediction:

I am doubling down on my 2024 prediction that Biden will not make it to the ballot.

2024 Predictions - given to clients in December '23:

Outlier: Biden drops out, and H2 prices that change of policy regime in with higher Volatility and Oil.

Rethinking My Oil Call

The ONLY caveat with the above prediction: I don’t see higher oil now into EOY.

Unless we get the next wave of inflation (as oil serves as an inflation hedge), or a geopolitical flareup (growing in probabilities sadly).

Demand (actual and speculative positioning) is simply not strong enough to compensate short-term supply disruptions.

As such, I am paying closer attention to the yen carry trade as oil serves as a sort of “currency hedge” against Yen devaluation.

By that I mean, if oil prices go down, typically the yen strengthens. And we know that is not allowed. The Yen is a political instrument, not economic one.

So I see lots of reasons WHY the yen would continue to fall, but what if…

Crude breaks lower not higher, and what if it breaks critical support at $65.65, and stays below? How do US 10Y yields rise if yen carry trade unwinds …

I’m quite sure many are not leaning in this direction, but I need to keep eyes wide open for you.

Inversion Matters A Lot This Time

That brings me back to my high conviction bet that the curve flattens, and with that:

1.  banks will realize shrinking net interest margin - which can lead to less bank lending

2. thus forcing more corporate and household refinancing and self-funding - depleting savings/selling assets

3. resulting in reducing labor - and reduced consumer spending

4. which triggers higher unemployment - and pulls forward recession risk.

5. At the same time this is occurring, the fed funds rate has become and will become more restrictive - as real rates rise.

This is a bearish market backdrop that has yet to materialize, but it bears watching.

And that’s how I’m spending my day off - figuring out ways I can help protect you from potential deflationary triggers that can upend this equity market melt-up in AI-tech driven names - while respecting the die-vergence of 76% of all equities sitting well below their November 2021 highs.