InterMarket R-EView

Short reviews of four of the largest global markets: US Interest Rates, US Dollar, Commodities, and US Equities and how they inter-act with each other. What does this mean to investors is added for context.

LayLine Asset Management Inc

Harry J. Campbell III, CMT

5/13/25

Interest Rates

There is a decided difference in the Rates covered here, the 5yr, 10yr, and 30yr.  It’s not so much the generally direction of travel, which are similar, but where Rates are relative to the highs reached just after the 1st of the year.  The 30yr is almost back up to that high at 5.005, currently at 4.943.  The 5yr however is nowhere close to its prior high.  The 5yr high around the beginning of the year was 4.617, currently at 4.121. Taken in the context of the 30yr, which is almost flat, the 5yr is quite a bit lower relative to its high around the first of the year.  On the surface this is suggesting that inflation, represented in our analysis by the 30yr, is becoming a concern.  On the other hand, the 5yr, representing growth in the economy in our analysis, is suggesting that the economy is challenged, not withstanding what US Equities are indicating.  The 10yr high was 4.809 around the beginning of the year, currently at 4.499.  In our analysis the 10yr, as the arbiter, is giving its nod to the suggestion from the 5yr that the economy is a bit challenged.

The FED met last week and left the FED Funds Rate the same.  In the context of the FED dual mandate, price stability (inflation) and full employment (growth), what FED Chair Powell said last week in his press conference, he is seeing risks to higher inflation (as suggested in our analysis by the 30yr) with the tariffs and at the same time some slowing of the economy (as suggested in our analysis by the 5yr) for the same reason, tariffs.  If the FED were to raise Rates to put downward pressure on inflation, it will cause negative problems for growth in the economy.  If they lower Rates to stimulate the economy, then inflation could start to rise again.  To further complicate the FED conundrum, the tax proposals making their way through Congress are on the surface, somewhat stimulative, which would apply upward pressure on inflation, but at the same time be supportive of growth.

US Dollar Index

The US$ has risen off its low last month, but is still well below where it was around the 1st of the year.  In addition to Rates, there are many other factors that affect the US$, one of which is trade.  The US$ is the global reserve currency (used for most international trade transactions) and with the known and unknown variability in the structure of the trade tariffs, it’s little wonder it would be weaker.  A weaker US$ benefits US owners of international assets, held in an international currency.  For example, if an investor owns a bond issued in EURO the investor gets interest income in the EURO. With the EURO stronger versus the US$, this means that when converted to the US$, the stronger EURO buys more US$. Basically they get more US$ for each EURO of income.  It also means that when a US based company sells into the EURO zone, it takes fewer EURO to buy products then when the EURO was weaker.  This increases the number of products, revenues, for US based production. Potentially, in this tariffs infused trade environment, a weaker US$ may give US companies a slight advantage, but the structure of the tariffs are still too fluid to draw any substantive conclusion.   

Commodities

The GSG commodity index is at about the level it was one year ago, and in about the middle of the sideways channel it has been tracking in over the past couple of years.  When the tariffs were announced on April 2nd, commodities dropped like a rock, basically from the top of the channel to the bottom.  As the tariff regime has been modified (general levels reduced) commodities have moved up.  From this one might conclude that higher tariffs push down commodity prices and more moderate tariffs push commodity prices up.  Not sure there is an obvious logic to this, but it is what it is.

Like the US$, the GSG continues to move in a fairly well defined sideways channel going back to mid 2021, suggesting a balance between the supply of commodities in general and the demand for those commodities.  As the structure of the tariffs established by the US starts to become more defined, commodity prices will respond accordingly, but until then, it’s any bodies guess where they will track.

US Equities

As of today, US Equities have returned to their level, slightly higher, they were at the beginning of the year in what can only be describe as a classic V shaped recovery.  History will convey just how fast (it was fast) that recovery was relative to prior V shaped recoveries.

What was written last time regarding Fundamentals still holds. “Earnings, margins, revenues, forward guidance, and so on are at best, a guess, and at worst, misleading.  We will need to wait for some clarity on the tariff issue, but don’t hold your breath.”  It does appear that earnings in the 1st quarter are on pace to be pretty good.  However, that was before the tariffs and the tariffs are likely to have altered the Fundamental picture for the next couple of quarters, if only due to the uncertainty of how they will affect both earnings and revenues.

On the Technical front, since the 1st of May, US Equities have pushed up through both the 50-day MA (moving average of prices) and the 200-day MA.  The 50-day MA is still below the 200-day MA so there is still more work before we can feel comfortable about this move.  We will also need to see how US Equities hold up as and when it retests the 200-day MA.  Technically the next test of whether this move is a bull run or a bear market rally is, on the bull side if it can get above the prior historic high and hold. For the bear case, a break below the 50-day MA, with confirmation, would add validity to the bear market rally, leading to more downside.  A break all the way down to, and below, the low in early April would substantiate the bear market scenario.

Without much in the way of fundamental analysis to go on and the technicals analysis needing some confirmation, in either direction, US Equities are at an interest level.  Until there is some firming of the tariff issues and some confirmation as to what’s in the tax bill making its way through Congress (will take a while to get through both houses), US Equities will respond strongly in either direction based on only the slightest amount of worthwhile information, skittishness comes to mind.

What Does This Mean To Investors?

There seems to be a lot of investor interest in the 10yr around the 4.5% level, where we are now.  Some would like to see it go higher and others want it lower.  The important consideration is why is it going higher or lower.  If the 10yr goes higher and the 5yr moves up with it and the 30yr does not move much higher that would be good for growth.  If the 10yr moves higher and the 30yr moves higher, not so good as it would suggest higher inflation.  If the 10yr moves lower and the 5yr moves lower, that’s not so good, but if the move lower in the 10yr is accompanied by a move lower in the 30yr, that suggests lower inflation, good for growth.  Needless to say there are many other permutations of how the three Rates move in conjunction with each other that would have more complicated outcomes.  What this means for investors is to watch how the 10yr moves over the next couple of months in conjunction with the 5yr and 30yr to get a feel for what’s going on in the other InterMarkets.   

LayLine Asset Management Inc

Harry J. Campbell III, CMT

4/22/25

Interest Rates

There is a noticeable divergence in the three Rates covered here (5yr, 10yr, 30yr).  The 5yr, which corresponds to the economy in our analysis, is looking challenged, that is to say still tracking lower in yield this year.  The 30yr, which corresponds with the inflation outlook in our analysis, is actually trending flat this year.  This, unfortunately, suggests a bout of stagflation is setting in as the 30yr indicates inflation is still a concern, while the 5yr is suggesting that the economy is struggling. Stagflation is when growth is slowing and inflation is rising. The 10yr, as arbiter, is neutral on the subject, suggesting stagflation is possible.  This puts the FED in a predicament, if they raise the FED Funds Rate to curtail inflation, then growth in the economy will also be curtailed.  If they lower Rates to spur growth, they will spur inflation. Hence the negative implications of stagflation if it materializes.

One of the questions being often repeated is why are Treasury bonds being sold when they traditionally would be seen as a place to hide out when economic risks are elevated, as they are now.  One reason involves one of our InterMarkets, the US$.  If a foreigner owns US Treasuries they get their interest in US$, which for the past two years has been relatively stable and strong.  When the interest income is converted from the stronger US$ to a weaker local currency the foreign investors get more of their currency, making the interest income much more valuable.  It also means that rather than converting to the investors weaker local currency, the investors reinvests the income in US assets.  However, as the US$ weakens and there is a perception that it will weaken further, the foreign investor see’s the value of their income drop as their local currency strengthens (a weaker US$ buys less local currency).  There is less incentive to reinvest those US$ in the US.  They will tend to convert (sell US$) the income to the strengthening local currency and to sell the US assets, Treasury bonds in this example, before they lose more value due to a weakening US$.  Back to the opening question, it’s likely (the data is not available yet) that foreign investors are selling Treasury holding before the US$ weakens further. 

This selling of US$ when converting to a local currency can become a continuous loop where selling begets more selling as the US$ weakens even more. 

US Dollar Index

The US$ has weakened since the beginning of the year when it was near historic strengthen.  It is now below the bottom of the sideways channel we have been tracking since early 2022.  If this break below the lower side of the channel is confirmed, the US$ would be in a downtrend.  Keep in mind that the US$ is not currently weak.  Looking at the DXY, an index comparing the US$ to a basket of foreign currencies, here are some of the highs (stronger) and lows (weaker) over the past 25 years.

Summer of 2000         120

March of 2007              73

Beginning of 2016      102

Beginning of 2020        90

October 2021              113

January 2025              109

Today                            99

The range over the past 25 years is from ~120 to ~73 with plenty of ups and downs.  There are many reasons over that time period for the US$ to rise and fall, including the Tech Wreck, Financial Crisis, and a Pandemic and none of them has led to the US$ losing it status as the reserve currency used in most international trade.  If you are interested, from a purely Technical view, currently there is support for the US$ down around 90 should it continue to weaken. 

A weaker US$ makes US produced goods and services less expensive for consumers with strengthening currencies to purchase, but it makes foreign goods and services more expensive for US consumers to purchase.  As indicated in Rates section, when it comes to returns on US assets (interest income, capital gains, rental income) that is paid to foreign investors, a weaker US$ makes the returns less valuable when converted to the local, stronger, currency.

Commodities

Commodities are about where they started the year, with plenty of gyrations in between.  They are still in a sideways channel that began 2022.  The GSG did drop significantly after the new Tariffs were announced, but it is rising again, about half way back to the level when the tariffs were announced.  The weaker US$ will keep upward pressure on commodity prices, as will the tariffs unless the tariffs reduce global demand (a strong possibility), then it could be a wash.  Regardless, until tariffs are codified for commodities, prices and availability will vary considerable making it hard for companies to make any plans.

US Equities

US Equities have recovered about half of the losses from the April 2nd  announcement of new tariffs, but still down significantly from the high on February 19th .  The new tariffs did and will continue to ramp up the degree of trade related unknowns.  In case you are wondering, the current level of prices has effectively eliminated the gains for US Equities for the last year. 

We have been covering the weakening of the US$ on the other InterMarkets and it does have an effect on US Equities for the same reasons.  If foreign investors think the US$ will weaken further they are likely to be sell US Equities before they lose more value when converting the US$ they get from dividends, capital gains and outright sales into their strengthening local currency.  The more foreign investors sell the US$, the lower the US$ will go, becoming a potentially vicious cycle.

Regarding Fundamentals for US Equities, the results being reported for the 1st quarter before the effects of the tariffs kicked in, is of little value in accessing a company’s strengths and weaknesses in the new tariff driven environment.  Earnings, margins, revenues, forward guidance, and so on are at best, a guess, and at worst, misleading.  We will need to wait for some clarity on the tariff issue, but don’t hold your breathe.

This is a time when Technical Analysis as an investment analytical tool takes center stage.  Technical analysis looks at the prices that are paid for a given investment.  These are investors talking with their money, not throwing around vague opinions.  The technicals are decidedly negative, yet at the same time indicating a wait and see attitude.  Looking at the moving averages (MA), the 50-Day MA has crossed below the 200-Day MA (referred to as a death cross) and moving sharply downward.  The 200-Day MA is starting to rollover and move lower, not a good sign.  All of the upward trendlines have been broken and a strengthening downward trendline is forming.  Both our Fibonacci and Elliot Wave analysis are inconclusive as to whether US Equities are going to head up or have more downside to go, signaling a wait and see attitude.  Some may question the validity of an inconclusive analysis, but I would say the Technicals are telling us that it will only take one comment or tweet from the administration to move the market up or down.

What Does This Mean To Investors?

While tariffs are the issue du jour, the US$ is the lead dog in our InterMarket pack.  What the US$ does over the next month or two, partially determined by the tariff issues, will direct the direction for the other InterMarkets.  What this means for Investors is to take your investing clues from the strengthening or further weakening of the US$.

LayLine Asset Management Inc

Harry J. Campbell III, CMT

4/8/25

Interest Rates

All three Rates covered (5yr, 10yr, 30yr) are still in a technical shorter-term downtrend that started in early January.  However, that observation is frankly of little value since the 4/2/25 announcement of significant tariffs on goods imported into the US, and we are only in the early days.  I don’t usually focus too closely on daily moves in Rates, but the last couple of days, including today, require closer inspection. 

While the 30yr is indicating continued concern with inflation from the tariffs and the 5yr is indicating concern for growth in the US economy, for the moment, let’s focus in on the 10yr. The Rate on the 10yr fell on Thursday after the tariffs were announced and finished lower on the day indicating there was buying of the 10yr which seemed pretty rational.  On Friday, the 10yr Rate dropped on the open (buying) but finished higher (selling) on the day which doesn’t seem rational given the risks associated with the tariffs. Then on Monday the Rate on the 10yr rose dramatically signifying more, a lot more, selling of the 10yr, not what would be expected given the risks to the economy from the tariffs.  Now on Tuesday the 10yr is rising again indicating they are continuing to sell the 10yr, why!

When the Rate on the 10yr rises, that means holders of US Treasury debt (domestic and foreign) are selling their treasuries.  This can be for many reasons; central banks around the world are repositioning their holdings due to the new tariffs, pensions and insurance companies rebalancing their bond holding to meet their long-term obligations, institutional investors are selling bonds to rebalance portfolios due to perceived economic challenges related to the new tariffs, there are too many bonds being sold by the US government to fund the deceit that could get worst under the new tariffs, or some leveraged (borrowed to buy) investors are selling what they can. There are many other reasons, but you get my drift.  It will take some time to diagnose who is selling and how the tariffs are, and will, effect those decisions.  The bottom line is investors are selling one of the safest assets for some reason(s) and it is unlikely it’s b/c they are overly positive about the economic prospects, at least in the near term.

US Dollar Index

Since the tariffs were announced last Wednesday night the US$ is slightly lower in value.  But, like Rates, that analysis is somewhat lacking.  While the US$ did drop dramatically the day after the new tariffs were announced, the US$ strengthened over the following two days suggesting buying of the US$.  For what it’s worth, today the US$ is slightly weaker, but still within earshot of where the US$ was before the new tariffs were announced, representing a very muted response by the US$ given it’s the reserve currency for international trade and we are in a trade war.  I’m going to leave it at that.

Commodities

Tariffs have been repeatedly said by many to be inflationary.  The rational is that tariffs raise prices of imported goods.  However, since the new tariffs were announce there has been a dramatic fall in commodities prices, particularly in energy, that looks to contradict that assumption.  There are three things (primarily) that drives commodity prices; Supply, demand, and the US$.  Given that the US$ is only slightly lower, this rules out the price action was due to the US$.  This leaves us to consider those two pillars of economics, supply and demand.  Energy is about half of the GSG and OPEC+ (Organization of the Petroleum Exporting Countries plus 10 others) publicly announced in early March that they would increase production in May.  What’s interesting is that after that announcement energy prices actually started rising.  So much for an increase in supplies (which haven’t started yet) causing the dramatic drop in energy prices.  This leads me to demand.  Reading between the lines, it would appear that the commodity complex has determined that the tariffs will be a very direct and significant challenge on the demand side of the price equation.  The prospects for lower demand for commodities in the US economy is not good for growth prospects for the US economy overall, but on the brighter side, it could blunt any potential inflationary pressures from the tariffs.

US Equities

US Equities has had one of, if not the fasted decline since the 2nd World War according to several analysts.  In the last InterMarket R-EView US Equities were just slightly above its 200-day MA (moving average of prices) and the comment was, now it needs to confirm the move.  It did not, to put it mildly.  Today we find ourselves well below the 200-day MA. 

Regarding Fundamentals, I can be brief.  The tariffs, and what may come of them, has rendered current fundamentals pointless as an analytical tool.  Earnings, margins, and operational valuations are now highly in question.  Nothing else to say.

Even Technical analysis has been stretched by the rapid decline in US Equities.  You will probably start to hear about the infamous technical formation referred to as the “death cross”.  This is where the 50-day MA crosses from above the 200-day MA and goes lower.  As the name would imply, this is not seen as a positive formation. The only positive trendline left on the charts goes back to the pandemic and US Equities are challenging that trendline.  A break below that five year old trendline, with confirmation, would be a viewed quite negatively.

I would be remiss if I didn’t bring up that any modifications or delays in the tariffs would be seen as a possible catalyst for an upside move.  During the last couple of days US Equities have rallied with even a hint of compromise in the implementation of the new tariffs.  But until that moment in time, the only thing that is certain, is the variability of possible outcomes.

What Does This Mean To Investors?

To summarize, over the past couple of days investors have been selling treasuries, generally considered one of the safest investment in a very volatile moment, the US$ is decidedly neutral which is very unusual given it is the reserve currency for most trade internationally, commodities have fallen hard when tariffs are generally considered inflationary, and US Equities have fallen to bear market territory quite suddenly.  What this means for investors is that until there is some understanding as to the impacts of the current tariffs on the InterMarkets, we don’t know what we don’t know, and that is not a conducive environment for investing.

LayLine Asset Management Inc

Harry J. Campbell III, CMT

3/25/25

Interest Rates

All three Rates (5yr,10yr, 30yr) are higher on the month and are exhibiting a minor upward trend, but that’s stretching it.  With all the talk about “uncertainty” one might think that Rates should be lower as investor look to the perceived safety in bonds and bond prices rise due to increased buying.  The up and down movement of Rates since last October has been, and continues, to be a bit of a mystery.  Allow me to run through a couple of thought processes that attempt to explain the direction of Rates.

The FED has got themselves in a difficult position.  If growth, as measured by the unemployment rate, continues to weaken (unemployment rates rise) the FED predicted course of action would be to lower Rates to stimulate the economy and drive an increase in jobs. If on the other hand (in classic economic form), inflation stays higher than desired and perhaps starts to drift higher the FED predicted course of action would be to raise Rates to slow down the economy to pressure prices lower.  However, if unemployment continues to rise and so do prices, the FED can’t raise or lower Rates without causing a problem with one or the other of their dual mandate (price stability and maximum employment) suggesting the FED will be on hold for a while.

Along with the word uncertainty (market uncertainty is the only certainty we have) the word “tariffs” is being throw around just as much, with many thinking that the two are tantamount to the same.  Perhaps, but let’s not confuse lack of knowledge with uncertainty.  We are certain that we don’t know how tariffs will play through the economy this time around, but that is not the same as uncertainty.  There is uncertainty as to the specific types and level of tariffs, but we are certain as the fact that tariffs of some stripe are going to implemented.  The Rates markets are wrestling with what the effects of tariffs will be on the US economy, and how best to respond both in advance and once we know what the specific tariffs are.  Since Rates hit their recent peak in early January as tariffs became a real likelihood they have been drifting lower (FED has not changed FED Funds Rate since December), certainly suggesting that investors are comfortable buying bonds.

Last fall, the FED lowered the FED Funds Rate by 1%, but the 10yr during that same time rose by more than 1%.  By most experiences this is not supposed to happen, at least not by that degree.  This raises the question, why.  The short, therefore incomplete, response is that the bond market concluded that the FED had given up on the fight against inflation by lowering Rates as much as they did.  This suggests that the Rates market felt the FED would have to reverse course and start to raise the FED Funds Rate to combat a reacceleration of inflationary pressures.  That call is still out.

The Rates market is extremely challenging at this moment, that I am certain of.

US Dollar Index

The US$ continues to weaken a bit, down from its recent highs early this year, but still about in the middle of its sideways channel that goes back to late 2022.  The US$ has been drifting down since it became evident that tariffs were going to be implemented.  The degree of tariffs is not critical to know, just to understand that tariffs affect trade and the US$ is used in most international trade transactions.  A weaker US$ makes US goods and services less expensive for foreign buyers to purchase, but makes foreign goods and services more expensive for US consumer to purchase.  In light of the added US tariffs on imported goods and services, a weaker US$ makes it even more expensive for US based consumers to purchase foreign goods and services, while it mitigates (lowers) the overall cost of tariffs imposed by foreigners on imports from the US.  It would appear that a weaker US$ in this tariff dominated trade environment, is detrimental to US consumers who want to purchase foreign goods and services, unless the desire result of the tariffs is to put pricing pressure on US consumers so they are incentivized to purchase US produced goods and services.

Commodities

The GSG continues its stair step move lower.  But this can be a bit misleading.  One could assume (dangerous in this market) that the threat of tariffs resulted in efforts to get ahead of the tariffs and build up inventories, where possible.  But the weaker US$ (makes foreign products more expensive) likely muted the advance purchasing to get ahead of the tariffs.  For example, the US imports steel and aluminum. With tariffs likely to be imposed on steel and aluminum, it would have made sense to buy more and inventory it. However with a weakening US$ increasing the cost of foreign produced steel and aluminum the math may suggest it is not worth it.  Additional tariffs and a weaker US$ does not seem conducive for US consumers of steel and aluminum, however it does set the stage for increasing US based production of steel and aluminum.

US Equities

US Equities have staged a nice little rally since its recent low on 3/13/25. Perhaps it’s the weaker US$ that has improved the outlook on revenues, or the possibility of less onerous tariffs coming down the pike, or perceived lower Rates reducing the cost of funding growth, regardless, it’s a nice rally.

Fundamentally, it is the end of the earnings season for the 4th quarter of last year and in a couple of weeks the 1st quarter earnings reports will begin.  With a weaker US$ some companies with international sales may report some positive, US$ related, increases in sales.  At the same time, potential tariffs will be sighted for a lack of visibility for sales and expenses going forward into 2025.  Consensus Wall Street forecasts indicate lower earnings and revenue rates for the 1st quarter than the 4th quarter of 2024. 

Technically, US Equities have risen back up to the 200-day MA (moving average of prices) but are still well below a downward trending the 50-day MA.  This rally is a classic retest of the 200-day MA and we would expect a little push and pull around this level. Until US Equities gets back above its 50-day MA, with confirmation, this small upward rally, while nice, will remain in question.

What Does This Mean To Investors?

Allow me to be blunt.  Saying that things are uncertain, certainly, does not provide any useful insight into investing.  What this means to Investors is to look at what the InterMarkets are actually doing to gauge their potential direction of travel and their effects on investments. 

References:

5yr: 5 Year Treasury Yield (FVX)

10yr: 10 Year Treasury Yield (TNX)

30yr: 30 Year Treasury Yield (TYX)

US$: On 9/24, Switched from Invesco DB (Deutsche Bank) US Dollar Index Fund UUP to DXY, ICE US Dollar Index.

GSG: On 2/11/25, iShares S&P GSCI Commodity Index replaced the DBC: Invesco DB (Deutsche Bank) Commodity Index Tracking Fund, as our commodity index.

Yield Curves: The difference between the 5yr and 10yr, and between the 10yr and 30yr.

FED: Federal Reserve

ECB: European Central Bank

US Equities: S&P 500

EURO: Eurozone Currency

YEN: Japanese Currency

IMF: International Monetary Fund

CMT: Chartered Market Technician

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