Dominoes......
Still higher on yields is the path of least resistance IMO
Very good level on the US 2-year yield here at 4.21-4.22% and a break should open up possibility of 4.38% again. This makes total sense if you believe we see a cut by the fed next week and then a hawkish pause, as 2's should then converge to the midpoint of the new Fed 4.25-4.50% range.
But then 2's are done and the "heavy lifting " comes from the longer end of the curve with likely further steepening.
I think that TY1 is once again going to make a push for the "HUUUGGGEEE" level around 109
Below there and a move to at least 107-04 (around 4.74%) and possibly even 105-10 (5%+) comes into play
On curves I am still watching the 2's 30's as having the most pivotal level at +35 to +36 bp's with a break opening up for extended gains towards +55 to +60 bp's . While that is holding the yield move is likely more linear across the curve
This will "Domino" into the USD. Despite the fact that seasonality is negative the USD in December (DXY has fallen the last seven Decembers in a row) I see seasonality as an "all else being equal" dynamic. If we get these yield moves in the coming weeks Santa goes down the chimney and seasonality goes out the door
USDJPY and USDCHF should be big beneficiaries, but I expect EURUSD, GBPUSD and others to also see a USD bid tone.
This likely also has a domino into Gold. The Gold future had a bearish outside day yesterday as did Silver and a combination of higher long-term yields and a higher USD will likely make these metals look less precious. I would not be surprised to see gold re-test the November low around $2,537 again.
The other domino to watch is Oil and in particular $71.51 on WTI and $75.41 on Brent. If these levels give way it would suggest that Oil will head materially higher. that will further feedback into yields which in turn will feedback into the USD and then likely also Gold.
All of this leading into what I think is likely a hawkish ease by the Fed on 18th Dec. I thought there was a good chance that we would get data that would validate a pause for them on the 18th but the bar, while not totally obliterated on that is very very high now and a pause next week would look political
Instead, I think we could get a "December 2018- Hawkish Jay" and that together with the developments above could be the final domino and "spook" the equity market resulting in a decent downward retracement into year end
