Pre-Market: Markets Flat as Next Week’s Fed Meeting Looms

Equities started the session without significant momentum before the weekend break, despite the numerous economic releases that came out pre-market. US industrial production surged to a multi-year high thanks to the sizeable beat in the measure, while the capacity utilization rate also climbed higher signaling healthy trends in manufacturing.

S&P 500 Futures, 4-Hour Chart Analysis

The housing market, on the other hand, continues to struggle in the US, with both building permits and housing starts missing the already modest estimates, as rising mortgage rates are weighing heavily on the segment. The Eurozone consumer price index also printed below the consensus and that and helped the USD in pushing higher against the Euro, with the EUR/USD pair falling back below 1.23.

EUR/USD, 4-Hour Chart Analysis

Forex markets have been more active than stocks on the relatively quiet day, and currencies continue to lean bearish, with the safe-haven Yen still being the strongest major, and with risk-on currencies taking a beating yet again. The USD/CAD pair hit another 9-month high, while the Australian Dollar is nearing the February low, as selling pressure intensified again.

AUD/USD, 4-Hour Chart Analysis

The effects of the forex trends are clear in stocks as the Yen’s strength is weighing on the Nikkei 9together with the notable weakness in China), while European equities have been slightly outperforming in the last couple of days, as the Euro slid lower.

Will the Collapse of the Yield Curve Continue?

Next Wednesday the Federal Reserve, first time with the new Chair Jerome Powell, will likely raise the US benchmark by a notch, to 1.75%, as the central bank continues its rate hike cycle. While the tightening move is now “priced in”, all eyes will be on the statement released by the committee, as the market is strongly divided on the prospects of the number of rate hikes this later on this year.

The Dollar is inching higher today ahead of the decision, and Treasury yields are very stable, but should Mr. Powell remain hawkish next week, yields could very well hit new highs again.

US 2-Year Treasury Yield, 4-Hour Chart Analysis

The current correction was, at least in part, triggered by the rising rates, and as the market is not buying the long-term growth story, long yields have been rising much slower than the short end of the curve, leading to the “flattening” of the yield curve.

While currently bond markets are heavily distorted by central banks, this flattening is traditionally a negative sign for the economy and especially stocks, and given the record valuations in the US, yields could provide the catalyst for a deep correction after the historic bull run in 2016 and 2017.

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Trader and financial analyst, with 10 years of experience in the field. An expert in technical analysis and risk management, but also an avid practitioner of value investment and passive strategies, with a passion towards anything that is connected to the market.