ONE VERSION OF YIELD CURVE INVERTS -- ANOTHER IS WEAKENING -- ENERGY SECTOR REMAINS WEAK
TEN YEAR - TWO YEAR YIELD CURVE INVERTS... Chart 1 shows the spread between the ten year and two year Treasury yields falling below the zero line which signals an inverted yield curve. That means that the shorter two-year yield is now higher than the longer maturity ten-year yield. That normally occurs when the Fed starts raising short-term rates to combat rising inflation. And is usually an early warning sign of an impending recession. Chart 2 shows that version of the yield falling to the lowest level since 2006. A second version of the yield curve is also falling.


TEN YEAR - THREE MONTH YIELD CURVE WEAKENS... A second version of the yield curve is the spread between the ten year and three month Treasury yields. Chart 3 shows that version of the yield curve falling to the lowest level in two years which means that the shorter yield is rising faster than the longer yield. It remains above its zero line which means that it hasn't inverted yet. But the fact that it's falling isn't a good sign. If it were to fall below its zero line, that would be added confirmation of an impending recession. Inverted yield curves are usually bad for the stock market.

ANOTHER LOOK AT WEAKER ENERGY SECTOR...Energy is the only market sector in the black for the year. Over the past month, however, it's become the market's weakest sector. That's due to a pullback in energy prices. Chart 4 shows the United States Oil Fund falling 23% over the past month. That puts it near potential chart support along its spring low and 200-day moving average (red arrow). At the same time, Chart 5 shows the United Stated Gasoline Fund losing 20% of its value. That combination of falling energy prices has taken a toll on energy shares.
XLE TESTS 200-DAY LINE...Chart 6 shows the Energy Sector SPDR (XLE) peaking in early June before falling to a four month low and a test of its 200-day moving average. The XLE has lost -28% during that period making it the weakest part of the stock market over the last month. A short-term oversold condition and presence of its 200-day line may offer short-term support. But it's major uptrend may be in jeopardy. That could carry good and bad news.
IS ENERGY INFLATION PEAKING?... Two hot inflation reports this week sent stocks tumbling before recovering on Friday. But the CPI (9.1%) and PPI (11.3%) reports reflected what prices did in June. Energy prices, however, have pulled back over the last month along with other commodity markets. That could carry good and bad news. The good news is that falling energy prices might help weaken inflation figures. Selling in other commodity markets might do the same. The bad news is that a peak in energy and other commodity prices could be another sign that the economy is weakening. That's because a weaker economy usually reduces demand for energy and other economically-sensitive commodities.


