NTEREST RATES RISE ON

INFLATION REPORTS --
STOCKS PULLBACK --
ENERGY HAS A BAD WEEK
John Murphy | February 17, 2023 at 02:34 PM

TEN-YEAR YIELD TESTS 3.90%... Bond yields climbed this week on two
reports showing that inflation gained during January. Chart 1 shows the 10-
Year Treasury yield testing some resistance at 3.90% formed at the end of
December. A close above that level would put the TNX at the highest level in
three months. The 2-Year yield which is more sensitive to expected Fed hikes
has already reached the highest level since November. That combination of
rising rates caused more profit-taking in stocks. No trend changes, however,
have taken place.
Chart 1
S&P 500 TESTS 50% RETRACEMENT LINE... Last week's message
showed Russell 2000 iShares which track small cap stocks backing off from
resistance at its August peak. The S&P 500 hasn't reached its August high but
is testing another resistance line. Chart 2 applies Fibonacci lines to the S&P
500 measured from last January's high to its October low. And it shows the
SPX meeting resistance at its 50% retracement line (middle line). That's a
normal spot to expect some profit-taking. The SPX, however, remains above
its moving average lines which keeps its 2023 uptrend intact. Despite this
week's uptick in CPI and PPI inflation, commodity prices remain on the
defensive.
Chart 2
COMMODITY PRICES DROP... We normally look to commodity prices to
help determine the path of inflation. Chart 3 shows the S&P GSCI
Commodity Index dropping this week and nearing a possible test of its recent
lows. No signs of inflation there. What's interesting is that commodity prices
and bond yields often trend in the same direction. That's because higher
commodity prices usually signal higher inflation. Their different direction was
highlighted this week with bond yields rising with falling commodities. In
fact, they've been trending in opposite directions for most of the last year. It
remains to be seen which one is right about the path of inflation.
Chart 3
LONGER TERM VIEW... The monthly bars in Chart 4 shows bond yields
and commodity prices trending in the same direction of most of the last ten
years. After falling together during 2019, they bottomed together during 2020
and rose together during 2021. In fact, it was the sharp rise in commodity
prices that warned of rising inflation pressures which helped push bond yields
higher. To the upper right, however, commodity prices dropped for most of
the last year while bond yields gained. While falling commodity prices may
be signaling that inflation prices are easing, that could also be a sign that the
economy is weakening. Commodity prices normally weaken along with the
economy during a recession.
Chart 4
ENERGY SPDR FALLS WITH COMMODITY... Speaking of weaker
commodities, crude oil lost -3% of its value this past week which helped make
energy shares the week's worst sector. Chart 5 shows the Energy Sector SPDR
(XLE) falling to the lowest level in six weeks. Last week's message suggested
that the XLE might be forming a potential "triangular" formation as shown by
the converging trendlines. This week's lower price action, however, is testing
that view. The Dollar Index rose to a six-week high this week which may also
be putting downside pressure on commodity prices.
Chart 5