INTERMARKET VIEW REMAINS BEARISH -- YIELDS SURGE WITH DOLLAR AS COMMODITIES FALL -- STOCKS PRESSURE JUNE LOWS

TREASURY YIELDS SOAR... An intermarket view across the various financial markets continues to present an overall bearish picture.   And it starts with this year's surge in interest rates.  Chart 1 shows the yield on 2-Year and 10-Year Treasury yields surging to the highest levels in more than a decade as the Fed embarked on an aggressive path to higher rates in order to lower inflation.   In order to do that, however, it needs to slow down the economy enough to push it into a recession.   That also has a bearish impact on stock prices which is one of the side-effects of an economy in recession.    Stocks, which peaked earlier this year, usually peak in anticipation of a recession.   Commodity prices, which usually peak later than stocks, peaked during June and continue to fall.   That's usually a sign that the economy is already in a recession.   Chart 1 also shows the red 2-Year Yield moving above the green 10-Year Yield earlier this year which signaled an inversion of the yield curve and another early warning of an impending recession.   Another side-effect of the more aggressive Fed has been a surge in the value of the U.S. Dollar which has risen to the highest level in twenty years.   While a rising dollar has helped push commodity prices lower, it's also causing problems for the global economy.

RISING DOLLAR HURTS FOREIGN CURRENCIES... Chart 2 shows the U.S. Dollar Index rising this week to the highest level in twenty years.  That's been due mainly to the fact that the Fed has been raising interest more aggressively than foreign central bankers.  A rising dollar normally has the effect of pushing U.S. commodity prices lower which may be a good thing.   But it has the negative effect of pushing foreign currencies lower.   One example of that is the Japanese yen in Chart 2 which has fallen to the lowest level in more than twenty years.  The same is true of the British Pound and Euro which have also fallen sharply.   Weaker foreign currencies can boost inflation in their respective countries at a time when foreign central bankers are raising interest to slow inflation.   We saw that on Thursday when foreign bankers raised rates more aggressively to combat inflation and support their falling currencies.    That may also explain why foreign stock markets have been falling harder than the U.S. which increases the threat of a global economic downturn.

COMMODITIES FOLLOW STOCKS LOWER.... As mentioned earlier, commodities usually peak after stocks as the economy enters a recession.   The black bars in Chart 3 show the S&P 500 peaking at the start of the year before eventually falling into a bear market.  The SPX is now retesting its August low.   The red bars show the S&P Commodity Index peaking during June and falling this week to the lowest level since January.   That also explains why commodity-related basic material and energy stocks are among the week's biggest losers.   Falling commodity prices should help reduce inflationary pressures.    Weaker commodity prices, however, are also consistent with a recessionary economy.

Chart 3

OUTLOOK FOR STOCKS REMAINS BEARISH... All of the intermarket charts shown above carry bad news for stocks.   And this week's heavy selling is a sign that stocks are likely headed lower.   The weekly bars in Chart 4 show the S&P 500 failing a test of its 40-week (200-day moving) during August before heading back down to its June low.   Prices are now threatening that earlier summer low and appear to be on the verge of resuming their 2022 bear market.   The flat green trendlines mark Fibonacci retracement levels drawn from the 2020 low to this year's high.   Those lines suggest some potential downside targets once the summer lows are broken.