Assessing Tariff Impact on Metals and Interest Rates

Adam Turnquist (00:00):

Hey, what's up everyone? Welcome to LPL Market Signals. I am filling in for Jeffrey Buchbinder this week. Adam Turnquist here, Chief Technical Strategist at LPL. As we look at our disclosures, just want to note that this call's being recorded on February 18th, about 10:00 AM Eastern time, and happy to have Lawrence Gillum, our Chief Fixed Income strategist joining us today on the call. How you doing, Lawrence?

Lawrence Gillum (00:28):

Oh, I'm doing great. Adam. I know it's really not an issue for you where you live, but bracing for a cold spell. I think we're supposed to get some snow this week, so I know that's old news for you where you are. But big news here in the Carolinas.

Adam Turnquist (00:42):

That is big news. Hopefully it warms up by the time I go there next week, but definitely cold here in the Midwest and lots of snow. I had the snowblower going the last two days in a row, so I'm ready for a break and some warmer weather, but lots to talk about today. Glad to have you here, because of course, the bond market on the move last week. We'll talk a little bit about that. Inflation and tariffs, which just continue to come out each and every day, a very fluid situation. We had some in the metals market that created a pretty big melt up last week in some of the metals. Also, we're gonna talk about history and Trump 1.0 versus Trump 2.0 from the bond market and the dollar perspective. That's some interesting takeaways I think there. And then we will look ahead, of course, for what's happening this week on the economic calendar.

Adam Turnquist (01:31):

It is a holiday. Shortened week, looks pretty light overall in terms of economic data and earnings this week. Turning to just a recap of price, action, and performance last week, another really strong week for markets of that resiliency theme continues to play out here. For the broader S&P 500. You can see up one and a half percent on the week. The equal weight index, only up half a percent. So if you take out the rallies we had in Apple, in Nvidia, I think the S&P would've been up 0.6%. That did weigh a little bit on overall market breadth and participation, declining shares last week, outpacing the advancing shares on the S&P 500. Marginally not a big negative breath week overall, but nonetheless, it was still negative. The NASDAQ composite, you can see up 2.6%. So big tech seemed to be back at least a little bit next or last week.

Adam Turnquist (02:27):

Small caps lagging the Russell 2000, basically flat on the week, really struggling for the Russell. Kind of stuck between the rising 200 day moving average right around 2200. Then you have some resistance overhead at I think 2325. That's the February high, so in a narrow consolidation range right now. So potential for a breakout, either higher or lower in small caps, and a lot to get through last week. In terms of headlines, we had Chair Powell on the Hill, giving his two-day congressional testimony. Lots to digest there. I think no major real surprises from the Fed. The fact that he noted there's still more work to do on inflation. I think we got evidence of that with the CPI report last week. Consumer inflation coming a little bit hotter than expected. There were some offsets though to that when you had the components of the wholesale or PPI report, the ones that feed into the PCE, or personal consumption expenditures, were lower the market liked that news as it did take a little bit of upside risk off that upcoming report. That's, I think, due out later this month. And then of course, we had a lot of tariff news, President Trump announcing 25% tariffs on aluminum and steel. Looks like or sounds like there's more to come on the metals market there in terms of tariffs. And then we had some news out of Washington in terms of the GOP in a reconciliation bill coming out as well. But nonetheless, market moved through all those headlines and traded higher. Lawrence, what were some takeaways from your perspective last week? Just the broader market?

Lawrence Gillum (04:05):

Yeah, so I mean the CPI data was certainly the market moving event within the fixed income markets. We did see yields move higher across the curve after that, that release rates rallied on Thursday. You mentioned this, the PPI number came in higher than expected at the headline numbers. But the individual components were perhaps softer than feared, which feeds into that PCE report. So now it's expected to have a, you know, a relatively decent PCE report out next week. So markets ended up just kind of where they were over the course of the past week. Ag up only about 20 basis points. That was really led by the investment grade corporate complex. Mortgages outperformed as well, but you know, essentially rates were kind of, you know, steady as they go last week relative to a lot of other weeks.

Lawrence Gillum (05:00):

We've seen a lot of volatility outta fixed income markets. But on a week to week basis, if you ignored what took place during the week, it would look like a pretty calm week last week. But the core sectors performed well, the muni market underperformed, which is interesting. The muni market sold off on the back of that higher CPI report, didn't rally after the PPI report. So we did get a negative week out of the muni market, which means valuations for the muni market relative to the taxable markets improved a little bit. So there's still some value in the muni market, particularly in that intermediate part of the muni curves. So there's some opportunity there to deploy new assets if there are any new assets to deploy. And then finally, looking at kind of the plus sectors.

Lawrence Gillum (05:47):

Preferreds had a good week last week, up about 50 basis points outperforming a lot of the other plus sectors. We still like preferreds. Preferreds are primarily financial institution issues, so they're, you know, I guess it's kind of a positive sign for the banking sector. You know, certainly we've had some challenges in the rate environment now that curves have regained their upward sloping shape. You know, that's kind of helped the financial sector out a little bit. So by and large though, a pretty decent week outta the fixed income markets. One of the worst things about our job, Adam, though, I'll say is watching these congressional testimonies for two days. It's a lot. And you're right there, there wasn't a lot of takeaway. There was one thing that struck me as potentially positive for the treasury market, though, and we're not gonna get into it.

Lawrence Gillum (06:36):

It's pretty wonky, but there's an expectation that, you know, the Federal Reserve could eliminate the capital charge on for banks to own treasury securities. It's called the supplementary leverage ratio. Again, we're not gonna get into it, but if there is that exemption, that should mean banks could buy treasuries again. They've been you know, penalized for buying treasuries here of late. But if that exemption goes into place, we could see some broad based buying out of the banks, which should keep a lid on yields. So, two days of, of watching paint dry. And that was kind of the nugget that I, that I took away from that congressional testimony last week,

Adam Turnquist (07:18):

<Laugh>, it was, and it's two days in a row, and it's mostly the same type of, whether it's soapboxing or the soapbox and political theater, we'll call it versus chair Powell, trying to dodge questions about tariff policies and their impact on inflation. I think that was a lot of it. He did a pretty good job, though. I would not wanna be in his shoes going into those meetings last week. Quickly on commodities, WTI crude trading lower on the week down 1.3%, you can see down around $71 a barrel, basically just stuck in a consolidation range, not really making any new lows, but not making much technical progress. There's a lot of supply and demand factors being flushed out. I think in the crude oil market. There's the concept of the drill, baby drill, as we've heard in 2025. But in terms of producers actually spending money to implement new drilling, prices don't really warrant new drills.

Adam Turnquist (08:18):

In terms of their profitability. A lot of those major companies, they're only gonna implement new drilling when WTI is at least above 70 in terms of making it a profitable return on investment for CapEx. Nat gas moving all over the place, downright around 360. As of yesterday, overall for the week, it was up about 5%, of course, colder weather coming through, increasing heating demand. And it's interesting because Nat Gas has had a surplus in terms of supply for the last couple years. We're starting to see those surpluses get worked down through some of this heating demand. We actually went into the first deficit for supply in terms of inventory levels recently for Nat Gas. So a little bit more of a balanced market there on currencies. Just want to note the big move in the dollar last week down one point a half percent.

Adam Turnquist (09:10):

Now, big move is for a currency, when it's down one and a half percent, that is a qualifying big move. And technically it did break through support at 107. That was a very important support level for the greenback that marked the upper end of this consolidation range. The dollar had been trading in for the last couple years, so we're now back into this range. I think the equity market is certainly welcoming that. And of course, international markets, we didn't touch on much of the international space for last week's price action, but we're continuing to see international markets outperform. Of course, our call is more on the longer term. When you look at some of the relative trends, we still like U.S. over international. I think there's an attraction in terms of valuations for some of the international markets. And of course, policy there is expected to be accommodative with the ECB likely cutting rates next month.

Adam Turnquist (10:05):

But longer-term trends, I think we still support U.S. over international markets, although the dollar providing a little bit of a tailwind for those international markets, especially EM last week. Jumping into the technical setup here for the S&P 500, we are now watching for record highs, it looks like we're gonna get a positive open here for the S&P 500. So we're right below 61 18, that's the previous record high. So a breakout from that level would warrant a minimum technical based price objective here around 63 50. We're just taking the size of that range that we've been stuck in for the last couple months, applying it to the breakout level. So that would be at least a forecast from a technical view, what we're watching in terms of confirmation of that breakout is market breadth. And we're starting to see an uptick in new 52 week highs within the S&P 500, but relatively low for a market trading only a few points away from record high territory.

Adam Turnquist (11:08):

That middle panel, you can see about 7% of S&P stocks hitting new 52 week highs. We're gonna wanna see that expand in tandem with the market. And the other one we're watching is just the percentage of stocks above their 200-day moving average. And we use that 200-day moving average really just simply to find the longer term trend. So when price's above the 200-day, we consider that stock or index to be in an uptrend. Of course, with the market making new highs, you wanna see it more and more stocks above their 200-day moving average. We haven't seen that yet, and we haven't seen that breadth indicator get back to levels that we witnessed in 2024. You can see that green line, that's 63%, that was the low end of the range last year. And when you start looking at market breadth and its importance to forward returns, we actually back tested the percentage of stocks above their 200-day, we put 'em in quintiles, and we looked at how does the market perform across each quintile and the current quintile.

Adam Turnquist (12:06):

We're in kind of this 48 to 62% range. Forward returns for the S&P historically have been about just over right around four and a half percent 12 months later. If you get above that 62 to 72% quintile, that's when the forward returns start to look much more constructive. Average returns in that quintile group, about 9%. So we're gonna wanna see that breadth expand again in conjunction with this breakout that we are potentially seeing here today on the S&P 500, but hard to argue with the bull market here. Longer term trend also higher, if we do get any type of pullback this week, look at the kind of 6,100 area for support. You have your 20-day and your 50-day moving average as well. You can see how well they've acted as kind of these dynamic areas of support.

Adam Turnquist (12:56):

And one of the other things that's evolved, I think a little bit more pronounced this year is just the rising dispersion in the S&P 500. We did a blog on this out on lpl.com last week under the research banner, if you want more details. But we're just gonna highlight the CBO S&P 500 dispersion index here on top. And this is really just measuring the difference in returns between individual stocks and the overall market. And you can see it moving higher. And when dispersion is higher, that's really the performance gap between the best and worst performing stocks is widening out. And we're coming off historically low levels in terms of dispersion. And on the bottom panel, that's just the correlation within the S&P. This is the one-month implied correlation. So when this is low, very low correlation, what this means when you have high dispersion, low correlation, it tends to mean you're in a stock pickers' market and there's the alpha generation opportunities are beginning to increase.

Adam Turnquist (14:00):

And that's really what we're seeing here. So a good sign, I think, for active management in the space. And for us, it is a more fun environment as well as we look at rotating into different areas of investment. And opportunity sets, again, begin to widen out. We did a Weekly Market Commentary on the metals market this week. We had, of course, new tariffs implemented from President Trump last week. 25% tariffs on aluminum and steel. Those are set to go into effect next month. Of course, the market wastes no time in pricing in higher tariffs. And this is just looking at overall performance across several different metals. This is year to date performance. You can see copper up 14% backed off a little bit last week are going into the weekend here, are still up. Pretty impressive gains here for the copper market.

Adam Turnquist (14:57):

Copper and, excuse me, gold and silver also up double digits you can see there. And we've had a pretty good run here as the market basically started to front run tariff risks. We knew that tariffs were coming. We didn't exactly know the size and when they would get implemented, but in terms of the market pricing, that risk in pretty efficient overall, even though some of the news hasn't been baked in yet, or some of the news hasn't been actually announced. We'll take a look at some of the other metals and how the copper market for example is really starting to price some of this in. Gold has really been a standout. Not only last year did it outperform the S&P 500, but you can see this year as well that momentum continuing. And there's a few tailwinds for gold that we talked about in our weekly market commentary.

Adam Turnquist (15:47):

Central bank demand has been a big one. And the World Gold Council, every year they survey different central bankers around the world. I think there's about 70 that participate in this survey. And every year they ask 'em what do they expect for their gold reserves? Are they gonna increase their gold reserves, unchanged or lower their gold reserves? They also ask 'em those same questions about the dollar. And you can see over the last few years how that survey and those responses have changed. 2022, for example, only 46% of central bankers were saying they want, or they're gonna increase their gold reserves over the next five years. Compare that to the 2024 survey. You're at 69%. And of course, a lot of that increase in gold reserves comes at the expense of dollar on the left side. You can see how many central makers are talking about adding to their dollar reserves over the next five years. That has continued to drop lower dollar at 62% in 2024 versus 42% back in 2022. I think some of this has to do with policies that were implemented coming out of the Russia invading Ukraine. They froze Russian assets, and I think the gold is one, we'll call it a loophole, Lawrence, is that fair to say? What are your thoughts here on, on central bank's dollar versus gold overall, some of these trends?

Lawrence Gillum (17:13):

Yeah, no, I think it does have a direct correlation to what you mentioned, with the freezing of reserves with the Russia, Ukraine situation. So gold is something that is harder to freeze and harder to take from central banks, especially if they have that in their possession. So we have seen a lot of central bank buying, which I thought was interesting is that it's, I mean, we hear about China, but Poland I think is one of the bigger buyers of gold as well.

Adam Turnquist (17:43):

Yeah, it's been Poland, a few other countries that are not necessarily large countries, but they are buying a ton of gold. I think the signaling you get from countries like China when they're buying gold tends to be a pretty good sign for the broader central bank space. We've witnessed that over the last year or so, the PBOC or People's Bank of China coming into the gold market, they took about a six month break here. We're gonna go over the gold chart in the middle panel. That's the monthly net change in China's gold reserves. You can see in the summer, there's basically no additions to their reserves. They came back into the market in November, December, and now January. So three months of buying from the PBOC for gold, that's a pretty good tailwind. We also had in the bottom panel, this looks at total gold ETF holdings.

Adam Turnquist (18:36):

And what's been interesting, if you zoom out multiple years, there's been a deviation with gold rallying to new highs and really little interest from the ETF space that's started to change over the last few months. We're starting to see an uptick in ETF flows that are going into physical gold holdings. That's another big tailwind, of course, what's happening in the dollar, for example, last week, dollar weakness helping gold rates, the fact that the Fed is still cutting rates, at least, that's what expectations are. I'll let you chime in there, but I think that's helping gold as well. Of course, inflation hedge, you can add that into the list of, of potential catalysts. And then can't forget about safe haven demand. So a pretty long list of catalysts that have helped gold here rally through the October highs around 27 90 little bit overbought here on a short-term basis. So if we do get any type of pullback, some areas of support, you wanna watch that 20 day moving average right around 28, 27. And then again, those prior highs around 27 90 that go back to October, but longer term trend here, still higher for gold. We're positive on precious metals as well here at LPL Research. Continue to, to like the momentum in some of these names.

Lawrence Gillum (19:53):

What's interesting is we've heard a lot more about gold these days here in the U.S., as well with the potentials of starting the sovereign wealth fund and taking our gold reserves and kinda marking those to market and funding this sovereign wealth fund. So it seems like everywhere we look in the financial markets, it's gold. There's discussions about gold, which of course will increase demand. So it's an area that has done well. I think you mentioned something at one of our Strategic and Tactical Asset Allocation Committee meetings recently as well, that gold outperformed the Mag Seven last year. Is that correct?

Adam Turnquist (20:28):

Yeah, so gold was up 25% last year. And when you think about the backdrop for gold to go up 25%, if you were to ask me, here's what the dollar did, here's what yields did last year, what did you think gold would do? There's no way I would've signed a 25% gain to gold if you had the dollar up. A lot of that was kind of in the back end of the year, but still gold shrugged that off. Rising yields, of course, last year. Overall, if you look at the 10-year higher on the year, and real yields also higher if you want to go to inflation metrics as well. And here's gold outperforming stocks. It's been done before in terms of gold outperforming in the 20% type year to date, or annual returns for gold, it's just pretty rare.

Adam Turnquist (21:14):

You typically see the market up 20% and gold up 20%. Kind of an interesting dynamic. But certainly I guess it goes to the point of momentum begets momentum with gold. And really, once it cleared 2070, those prior highs from 2020, 2022, it's been off to the races for gold and pretty impressive run, copper now joining the party. Can't forget about Dr. Copper here. Finally showing a little technical progress, basically reversing a downtrend off the highs from last year, getting back above the 200-day moving average. So some important technical levels that copper is cleared, not out of the woods yet. There's, you can see that red line above copper. You have, I think right around 480 and then 490 are the next big resistance levels. But one of the catalysts for copper outside of more of the macro forces, those being, you know, potential for China to rebound in terms of economic growth.

Adam Turnquist (22:14):

They're one of the largest importers of copper. And just the backdrop for global growth, it's just been front running the tariff risk for copper. There hasn't been an official tariff implemented on copper. I think President Trump and the White House has said there's one coming. They're just working out the details. And again, the market doesn't waste any time. We look at in the middle panel, CME copper, so domestic copper, the Comex copper versus the London Metal Exchange copper, that's LME. And I converted this to show the premium in prices for CME copper versus LME copper. That's just basically the demand for copper housed in and warehoused in the United States right now. And that near term demand spike, you can see that spread between domestic versus London copper hitting a record high last week. It's backed off a little bit, but basically anyone that wanted copper was buying it as quickly as they can, getting it to the U.S. <Laugh> and getting it warehoused before those tariffs were implemented.

Adam Turnquist (23:13):

And on the bottom panel, you can see it even more clear, that's the, the Comex copper. This is the inventory at the Comex for copper that coming off pretty low levels getting up to multi-year highs in terms of the inventory levels. Of course, the expense there is coming out of London and moving copper to the U.S So another tailwind there. And of course, copper often a leading economic indicator. I think when you look at what's happening in copper prices, the ISM manufacturing data starting to turn positive as well. A lot of times you see copper and ISM manufacturing bottom at the same time, I think a pretty good sign for global growth, we'll call it, when you see these type of potential bottoms forming. Of course, there's some nuances, as we said, the front running of tariffs certainly supportive of copper too, but I think overall a pretty good sign here for Dr. Copper.

Lawrence Gillum (24:10):

Yep. I actually learned something in your Weekly Market Commentary, the differences in those prices between the LME and the CME. Was it 10? It's like 10% difference in terms of returns just this year.

Adam Turnquist (24:23):

Yeah, if need to arbitrage it out. Yeah, there's, and trust me, people are quickly doing that. So that's, that's driving that. And of course there's implied tariffs that you can derive from that, but the market is definitely pricing in a, I don't know if I can use the word imminent or not, but I would say tariffs coming in anytime for copper. So watch for some headlines there. Switching gears to your world and the bond market, and I thought this was really interesting, just comparing Trump 1.0 versus 2.0, will history rhyme? I'll let you answer that one. Lawrence, here's a look at the treasury yield curve. Why don't you walk us through this one?

Lawrence Gillum (25:01):

Yep. So obviously the, the first couple weeks of Trump 2.0 have been pretty exciting, to use a word there in terms of market reactions. And, you know, we're looking to see if there's any sort of corollary or potential corollary to what's taking place now versus what took place during the first Trump administration. And really the key themes that took place during the first Trump administration is you saw a lot of the same sort of tariff announcements and the reaction out of the rates market. The treasury market may be a little bit unusual at first blush. So if you look at the treasury yield curve, look, the treasury yield curve is all the treasury securities that the Treasury Department issues ranging from, you know, one month out to 30 years.

Lawrence Gillum (25:49):

So there's a lot of different tenors across that yield curve. What we're showing here is the difference between yields in the two-year treasury yield and the 10-year treasury yield. And what took place last year, or I'm sorry, the last administration is whenever there was a tariff announced the front end of, of the yield curve quote, the two-year treasury yield increased and the 10-year treasury yield decreased. So essentially you're getting two, two different dynamics out of the treasury market. The front end of the curve is more concerned about higher prices. The back end of the curve is more concerned about slower economic growth. I think with tariffs, the potential for increased prices gets a lot of traction. But probably the bigger takeaway for tariffs is that you tend to have slower economic growth.

Lawrence Gillum (26:35):

And that shows up with the apol treasury yields on the 10-year part of the curve and out. So essentially what you get is these flatter curves where there's not much difference between the two-year treasury yield and the 10-year treasury yield. You can see starting back in 2017, there was about 130 basis points of difference between those two securities, meaning the 10-year treasury yield out yielded the two-year treasury yield by about 1.3% over the course of the next, call it three years, the treasury yield curve flattened. And you were getting very little difference between two-years and 10-year treasury yield security. So the expectation is for this time around to see something similar. And the price action that we've seen out of the treasury market has in fact been pretty similar.

Lawrence Gillum (27:24):

We were on our way to a steepening of the yield curve earlier in the year, but post some of these tariff announcements, the yield curve has actually flattened, and we're back down to around 20 basis point difference between two-years and 10-years. Whereas before it was closer to about 45, 50 basis points. So we could see flatter curves in the treasury yield market take away from an investment perspective is as long as curves are flat or even potentially inverted, there's not real incentive to, to extend duration in portfolios to take on longer maturity securities. So we would say, you know, stay invested in the kind of the one to five year part of the treasury yield curve because that's where the higher yields are relative to the amount of duration risk that you're taking. So it may be a little counterintuitive that we're gonna see, you know, flatter curves despite the fact that you know, we could see higher prices, which would all else equal maybe point to steeper curves. But that's not what typically happens.

Adam Turnquist (28:27):

Yeah. You talk about duration risk, I'm curious on credit risk, 'cause I've heard you talk about going, you know, going down in credits, really not paying off. Is that going to change anytime soon with the new administration? Or not new administration, but we'll call it Trump 2.0?

Lawrence Gillum (28:44):

I don't think so. So what we're showing here are corporate credit spreads for the high yield index as well as the high grade index. And the scale is kind of distorted by what took place in COVID. But even if you kind of normalize that, there was a lot of volatility in the credit markets back in 2019 with the first trade war with China. We saw spreads for the high yield bond market essentially gap out to about 500 over so 5% above treasury securities. Right now we're about 2% over treasury securities. So if we see a similar type of reaction, we could, you know, see some losses in the high yield corporate credit market, similar type story out of the investment grade universe, spreads widen on the back of these trade wars. And what's particularly challenging right now is that corporate credit spreads are still around, or even at secular tights, meaning there's not a lot of additional compensation you're getting for owning corporate credit. That's why we've been relatively weary on investing in the corporate credit markets. We just don't think you're gonna get compensated for the additional risk in that market, particularly if it reacts similarly to what took place in Trump 1.0. We are likely headed for a volatile market out of the corporate credit space.

Adam Turnquist (30:04):

Right. And it looks a little asymmetric when you look at this chart. I think I had one in a presentation I did, how low can they go? And they don't get much tighter than this historically, right? I'm talking some pretty historic readings for credit spreads overall. And to your point, if we start to see them expand a little bit to see some volatility in the credit market.

Lawrence Gillum (30:27):

Yeah, and I know we're talking about the index level, and we talked about this in our investment committee meetings, but there's investors out there that have preferred to own corporate credit paper over treasury paper. So they're actually getting a negative spread between their bonds that they own and treasury bonds. So it's an environment where everything is, not everything, but a lot of things are really expensive right now in the corporate credit market. And to your point, it does look like it's pretty asymmetric. Spreads can only tighten so much before they're, you know, on top of, or even through treasury securities. So our advice would be to stay up in quality, don't chase returns out of the corporate credit market because there's only, you know, so low that these spreads can go.

Adam Turnquist (31:12):

Maybe that's a call for another day. We can talk about the risk of spreads going inside treasuries deficit concerns, but we'll leave that for another day. One of the other trends that we're seeing in comparing Trump 1.0 to 2.0 is just the price action and the dollar. I threw this into your section here 'cause I thought it was really interesting. In the black, we're looking at the U.S. Dollar index from October 2016 through November, we'll call it, of 2017. So post-election, we had this big rally in the dollar that Reflation trade, if you're remember that theme coming out of the 2016 election that only lasted till about December, at least in terms of the dollar strength, and then the dollar started to roll over. Of course, this came at a time when the Fed was actually raising interest rates as well, and I think it perplexed a lot of economists and strategists with why the dollar was moving lower against that backdrop.

Adam Turnquist (32:12):

Part of it has to do with just growth expectations. Lawrence, your yield curve spread the tens and twos during that time, moving lower of course as growth was kind of getting priced out of the market. And then you had Europe, for example, outperforming on an economic standpoint. So that helped drive the dollar lower, the euro a big weighting in that dollar index. So that's some context around why the dollar moved lower. Here we are now in bright blue tracking very closely though to the progression of the dollar back then. So Trump 1.0 versus 2.0 for the dollar looks pretty similar. And if you extrapolate this chart out, it would suggest some downside risk here for the dollar, not necessarily our case. When you think about what the Fed is doing, where inflation's at, where rates are at in the macro environment that we're gonna have a big drawdown in the dollar.

Adam Turnquist (33:03):

I think right now, technically you make the case maybe more range bound as the dollar did break through that 107 level, but I think it does highlight how quickly the narrative can change. If you think back in 2016 to 2017, at least for the dollar, this idea that it was going to continue rallying quickly faded. And maybe that's what we'll see play out here for the dollar index yields of course impacting the dollar. I zoomed out on the 10-year because I wanted to highlight just what happened in the 10-year back in 2016. We had a big jump in that reflation trade dynamic for yields. You can see election day 2016 on the far left, that kind of faded as well once you had tariffs come out. You know, the big headline early January, 2018, the solar and the washing machine tariffs were announced that had moved the, the 10-year higher as well.

Adam Turnquist (33:59):

But ultimately it did trend down into obviously the pandemic lows there. And then when you zoom even further out, I don't have this chart, and look at just what happened between 2020 and basically 2022, we had a reversal of a secular downtrend in yields, and that's where we're at now. We're still above that downtrend. We took out this kind of 325 resistance level, and we've been trending higher really since on a longer term basis. We've had pretty consistent higher highs and higher lows. On a more near term basis, though, technically we had some pretty big moves in at least technical moves, we'll call it, in yields. We've pulled back considerably from those plus 475 readings on the 10-year. We broke through 450 last week. And that was a key level to watch that not only marked the November highs, but the 50-day moving average.

Adam Turnquist (34:51):

And then there's a technical formation called head and shoulders pattern that was the neck line right around 450. So that to me at least technically suggests there could be some downside risk to yields maybe down to the 200-day moving average there at 425. But I think maybe just more of a range bound market, establishing potentially the upper end of the range, call it around 485, and then maybe the downside closer to the 200-day moving average or lower closer to maybe 4%. I know Lawrence, you wanna hear that as well, considering your call for yields to end 375 to four and a quarter, I guess outside of the technicals here, what are you seeing on 10-year?

Lawrence Gillum (35:37):

Yep. No, I think that's right. So, I think what's, you know, ultimately could happen this year is again similar to what took place in Trump 1.0 is that we could see a rally towards the end of the year if economic growth slows a little bit. Right now, markets have priced out a lot of rate cuts. Our view is that, you know, maybe we get two cuts this year. Markets are wrestling with pricing in that second cut. So right now there's about a 50% probability of a second cut in 2025. If the economy slows as we think it may towards the end of this year, you know, you could see rates move off of these highs. I do think we are in a trading range in the near term. There's a lot of things that, a lot of reasons why you know, rates are elevated with budget deficits and supply coming to market.

Lawrence Gillum (36:25):

But you know, this administration has shifted its focus seemingly from the equity markets to the 10-year treasury yield. We've heard Bessent talk about lower rates, not necessarily at the Fed funds rate, but at the 10 treasury yield level because that's really the rate that a lot of consumer loans get priced off of. So their focus is on the 10-year treasury yield. So you know, there's a couple ways they can change it through policy or through politics. If it's policy-related, you know, we could see lower yields. I think if it's politics, the market will sniff that out and maybe price in the prospects of higher inflation. And we see, you know, the opposite happen. But we talked about the potential for banks buying more treasury debt with this exemption potentially that should bring yields lower as well.

Lawrence Gillum (37:13):

But I think you're spot on with the near term. It looks like we're just kind of, you know, in a trading range until the economy slows or the labor market shows some signs of weakening. I don't know that we're gonna see a six, there's a lot of commentary about 6% treasury yield or 7%, or I think there was a 13 number out there at one point. I think to get to those types of numbers, we're gonna need to see the Fed start hiking rates again versus, you know, kind of just staying on hold for longer. So but yeah, then

Adam Turnquist (37:46):

Trading range narrative would clearly have to shift on a lot of things, including inflation. That would be obviously the catalyst there. Curious your thoughts on overall just auction demand you're seeing in longer duration, you think like the geopolitical mess, we'll call it. Have we had any impact that you're seeing in terms of indirect bidders or foreign buyers coming in on our treasuries? Or has that been relatively stable?

Lawrence Gillum (38:09):

It's been relatively stable. We had some auctions last week, the 10-year treasury yield and the 30-year treasury yield. They were both kind of just middling. So we do get kind of you know, good auctions and bad auctions. There's not been an auction that's been particularly troublesome. So there's usually pretty strong demands. It comes down to price concessions. But what's interesting about, and I think I'm gonna write about this in the Weekly Market Commentary for next week, is that we're starting to refinance ERP, so zero interest rate policy. So we're seeing a lot of debt come to the market that's, or sorry, a lot of debt maturing that has very low coupons associated with it. And we're replacing that with coupons that are much higher, which of course is going to add to the federal deficit, regardless of what happens with DOGE or anything else. We're gonna be increasing our federal deficit just by refinancing debt that was issued at very low coupon rates. So it is a good thing for investors. That means you're gonna get paid more. Not necessarily a great thing for the finances of the federal government, though.

Adam Turnquist (39:18):

There's some alarming stats I think you've highlighted a few in terms of just those refis that are coming up. Some pretty expensive refinancing for the treasury.

Lawrence Gillum (39:30):

The 10-year last week that was refinanced is going to add $1.7 billion to the deficit over the next 10-years. Just re I mean, just because of her refinancing.

Adam Turnquist (39:41):

That's one issue, right?

Lawrence Gillum (39:43):

That was one issue

Adam Turnquist (39:43):

Yeah, that was one of the stats that I was a little sticker shock when I read that. Turning to the week ahead, of course, a holiday shortened week, not a lot of data for the week as well. A lot of housing data markets mostly look past a lot of that. I think in terms of it as a read through for the broader economy, FOMC minutes are probably the biggest one this week we'll call it. We'll get some color maybe on their view on inflation. I don't think there's gonna be a whole lot considering we had Chair Powell and a lot of Fed speak last week as well. I think we're pretty in tune with where the Fed is at. Of course there could be some surprises there. I think that's probably the big one. Of course, we'll be looking at the weekly jobless claims as well. That becomes increasingly important. They're trending and continue to remain very low labor market. Looks pretty solid. Anything you're watching this week on your end?

Lawrence Gillum (40:42):

The other thing that I would add is just we have more Fed Speak coming up this week too, so the quiet period is over which means that all these Fed officials want to get out there and talk about monetary policy. I'm not a big fan of all the Fed Speak, I think it just adds volatility for no particular reason. But that's really, I think the kind of the bigger, I don't wanna call it a risk, but that could be a volatility inducing you know, moment if a Fed official says something that is potentially surprising. But the economic data this week should be pretty tepid in terms of market moving.

Adam Turnquist (41:22):

It gives a little bit of a break as strategists for the last few weeks. It's been a wild few weeks here in the market with all that's gone on, earnings inflation, tariffs, and everything else. But it makes our job challenging but fun. Of course, I think that's gonna do it. So thank you for joining us Lawrence. Appreciate you hopping on here today, of course. And of course for everyone tuning in, Jeff Buchbinder, we'll be back next week for another Market Signals. So until then, have a great week everyone. Thanks.