Hey There Income Hunters,
Richard Clarida and Lael Brainard from the Fed spent the day Wednesday strongly downplaying suggestions of an early slowdown on quantitative easing (bond buying).
That sent yields sharply lower.
Then, just after 9 p.m last night, the US 10 Year Treasury soared almost 5 basis points, from 1.07% to 1.12%, in just a few minutes amid fears that $2 trillion could cause inflation to spike well above 2%.
“My priority is to get, first and foremost, a stimulus bill passed,” President-Elect Biden said earlier this week. He also highlighted that the historically low interest rates will bolster both the short-term and long-term growth outlook, saying it would “reduce our national debt burden“ and “if we don’t act now things are going to get much worse.”
Reduce our national debt burden!?
THAT is an interesting statement …
He can only mean that the package will be so pro-growth that GDP will soar and we can grow out of our debt burden by creating much higher wages and productivity, allowing for the debt to be paid off.
Let’s hope he is right.
Bringing it Home
How the Dollar reacts to this new stimulus is critical.
It has shown signs of a reversal in the downtrend (see chart below).
$2 trillion of new stimulus could turn the trend back down. That would be bullish for stocks, bullish for commodities and bearish for bonds …
So, stay tuned.
The chart below shows a “Positive Divergence” …which is a favorite technical indicator of mine and it signals a reversal in trend.
Here’s how it plays out…
- The dollar index (DXY) made a new low (red circle in top panel)
- The relative strength indicator (RSI), bottom panel, showed greater strength than the previous low.
- This is called a positive divergence between price and RSI and it is a powerful sign for a reversal in trend.
There are so many cross flows of information right now: Transition to a new administration, Covid-19 resurgence, Fed stimulus, fiscal stimulus, debt issuance and more …
The key is to prioritize importance based on what the market perceives to be the most important driver
And NOW we know … it’s $2 trillion in fresh spending directly into the economy.
Live and Trade with Passion my Friends,
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