As I have emphasized recently the 2007 analog that played out perfectly on the US 2-year yield from the highs set in October last year into mid-October this year tracked almost perfectly.
However, I have also noted that this analog appears to be breaking down as per my 21st Oct note Parting Is Such Sweet Sorrow
and in the follow up note on 23rd October titled Be Afraid......Be Very Afraid
Those notes were a warning that the price action in markets (with the 30-year being especially interesting) and the backdrop today compared to 2007 at the same point appeared to be diverging. This dynamic is when an historic analog is most susceptible to breaking down.
When does a warning become a clear "change of view"?
That would come If we saw the US 2-year yield post a weekly close above 4.09-4.13%.
Such a break, if seen, would suggest a danger that we could be looking at an acceleration higher in the 2-year yield back over 4.4%
That seems like an almost unthinkable move but as I often say "The only thing unthinkable in financial markets is that anything is unthinkable"
The chart below shows where that target comes from
We have already broken above the 55-day moving average after nearly 4 months below with a wide gap to the 200-day MA at 4.42% which on the break becomes the target
The 38.2% retracement of the fall which began in earnest in May also stands at 4.42%
The pattern could be construed as an inverted head and shoulders on a break over 4.085% suggests an even higher level (but that is for another day)
Major resistance (yields) stands between 4.09% and 4.13% (recent highs, mid-August high and Jan-Feb lows)
A break above all those levels, if seen, (weekly close) would open up that 4.40%+ level.
This area between the upper bound range of 4.40% to 4.42% and the lower bound range of 4.09% to 4.13% on the 2-year yield has been pivotal over the last 10 months.
Dec 2023: Weekly close below the upper range sees us hit the lower support range 3 weeks later
Mar 2024: Hold of upper support range on re-test leads to a sharp multi week move higher.
July 2024: Weekly close below the upper range sees lower range tested (and broken) the following week.
Late July/early August 2024: Weekly close below the lower range. Re-test 2 weeks later holds and yields fall to the trend low in September
Oct 2024: We held on the first test 2 weeks ago and are now testing again. A weekly close above, IF seen, would suggest (hard though it is to believe at this point) that we could rapidly revisit the upper range at 4.40-4.42%...and possibly quite quickly
I would not pre-empt this break but equally, if seen...I would not ignore it.
Of course, the "Million dollar" question is- what could generate a move of this magnitude in such a short space of time?
What might the Dominoes be?
There are some obvious ones (some more important than others)
Geopolitics: We have already had that "Jolt" overnight IMO. The Israeli response was measured and specific with no focus on Oilfields and Nuclear facilities. Iran has already professed that the damage was "limited" (Unlikely) in a clear de-escalation statement. For at least the foreseeable future that probably puts an end to any direct Israel-Iran-Israel attacks. While that is probably an easing factor in terms of the Oil price (higher Oil tends to feed into higher yields) it by definition helps at both the discretionary spending level and at the "risk" level. this probably allows both equities and yields to once again head higher into the election.
JOLTS next week (29th). We have clearly seen in recent months that a decent rise in JOLTS month on month has led to a "beat" on NFP the following month. I covered this in detail on Oct 2nd in my piece titled The Day After Tomorrow.
This is probably the weakest of the potential catalysts to be honest.
Core PCE (31st October) Again likely not a big catalyst in that respect as a "high" 0.3 is already expected and we are losing a 0.32 from last year so the bar is high for the YOY rate to rise, and it is already expected to "round down" to 3.6% with a 0.3 print.
However, it should be noted that when Waller shifted to a more dovish inflation "tack" he cited the possibility of the (selective) 4-month annualized rate dropping to about 1.8% which it did last month. Printing a .3 this time puts that 4-month annualized back up to about 2.4% (also the 3-month annualized at 2.4% and the 6-month annualized at 2.3%)
Employment data (01 Nov) This is of course the big one with the market looking for about 120k NFP and a stable 4.1% unemployment rate.
We have set aside the analog for 2007 in markets and broad backdrop but so far the Employment analog (when it comes to NFP) remains reasonable.
What happened with these numbers in 2007. NFP was expected at 85k and actually printed at 166k. The prior number was revised lower by 24k. The unemployment rate remained unchanged at 4.7%as expected.
I have voiced my scepticism about the outsized Govt. jobs created last month that gave us that low unemployment rate but there is no strong foundation at this point to expect that to be revised next week.
We also have ISM indices on 01 and 05 November but they are unlikely to be big drivers
And then there is the 200 lb. Gorilla in the room- the Presidential election
What if we do not know the result for sure on 7th Nov when the Fed decision comes?
What if the result is a Trump win?
What if the result is a Republican sweep?
All of these are three credible scenarios with the other credible result likely a Kamala win (The present odds suggest a republican sweep looks more likely that a democratic sweep)
In 3 of the scenarios above (potentially coupled with some of the economic data coming in solid- in particular employment) will the Fed really want to move rates on 7th November?
I could see an article coming out from Vice Chair Timaraos :-) IF the inflation/employment data were robust suggesting a cut is a "toss up" leaving the election outcome as the deciding vote.
Of course, none of the above may happen. We may not break that range on 2's. We may not surge towards 4.4%+.
However, the point here is to note that while that does seem like an almost unthinkable move- There is a potential path to that outcome.
It is NOT a ZERO delta possibility by a long shot.
