My model suggests that curve-flattening is over. I expect the FOMC to leave the fed funds rate unchanged at its Sept. 20 meeting, because the effects of Hurricane Katrina will be considered a threat to sustainable economic growth.
U.S. Treasury Yields
Even though the minutes from the Aug. 8 FOMC meeting were a bit hawkish, the monetary policy body cannot ignore the damage Hurricane Katrina has done to the economy. Shortly after the release of
minutes on Tuesday, the yield on the two-year declined, richer than its five-week modified moving average at 3.950% and challenging the Federal Reserve to buzz off.
Wednesday's month-end closes resulted in only one monthly resistance, 4.095% on the 30-year. That should limit the decline in yield at the long end, while a "flight to quality" and a panic reversal of "curve flattening" trades drive the yield on the two-year through five-year down toward the fed funds rate at 3.50%. This scenario is gaining credence, because the month-end close on the five-year was richer than my annual pivot at 3.878% and my quarterly pivot at 3.912%. Also keep in mind that two-year yields can trade below the funds rate.
The 10-year is richer than my new monthly pivot at 4.106%, which puts the focus on monthly resistance at 4.095% on the 30-year. The Fed needs to make sure that rates stay low enough to provide enough credit to help rebuild the Gulf Coast, which was leveled and altered by the storm and will take years to restore.
In my judgment, a strong employment report on Friday is meaningless. The Fed's Beige Book report next Wednesday, which may have been written well before Katrina's strike, should prove equally so.
Closes on Friday are highly likely to be richer than the five-week modified moving averages at:
- 3.952% on the two-year;
3.989% on the three-year;
4.044% on the five-year;
4.199 on the 10-year; and
4.426% on the 30-year.
These closes would shift the weekly chart profiles for all of these issues to positive, suggesting lower yields through September.
Gold should hold my new monthly support at $427.8 on further weakness.
I expect crude oil to stall at my monthly resistance of $70.32, or to return to that level as a magnet on spikes above it.
The CRB Index may have peaked, because I show quarterly resistance at 331.76 and monthly resistance at 335.13.
I show new monthly supports for major averages at:
- 10,172 for the
S&P 500 futures;
2053/1969 for the
3472 for the Dow Transports; and
634.53/621.64 on the Russell 2000 futures.
If September proves to be a weak month for equities, these monthly supports should be the low end not only for this month but for the year.
On the flipside, I show monthly resistances at 411.45 / 418.40 for the Dow Utilities. This overall band represents the neutral zone for September. My weekly model shows weekly support at 400.66 on Dow Utilities and weekly resistances at 10784 Dow, 1248.4 S&P, 2232 / 2242 Nasdaq, 3902 Dow Transports and 680.98 Russell 2000. These probably will be lowered next week.
Closes on Friday relative to the five-week modified moving averages listed here will determine the status of the weekly chart profiles, which are mixed. This implies that we'll see a range-bound trading environment where the low end has not yet been confirmed.
- Dow 10,514;
Dow Utilities 392.50;
Dow Transports 3680; and
Russell 2000 654.86.
Richard Suttmeier is president of Global Market Consultants, Ltd., chief market strategist for Joseph Stevens & Co., a full service brokerage firm located in Lower Manhattan, and the author of
newsletter. At the time of publication, he had no positions in any of the securities mentioned in this column, but holdings can change at any time. Early in his career, Suttmeier became the first U.S. Treasury Bond Trader at Bache. He later began the government bond division at L. F. Rothschild. Suttmeier went on to form Global Market Consultants as an independent third-party research provider, producing reports covering the technicals of the U.S. capital markets. He also has been U.S. Treasury Strategist for Smith Barney and chief financial strategist for William R. Hough. Suttmeier holds a bachelor's degree from the Georgia Institute of Technology and a master's degree from Polytechnic University. Under no circumstances does the information in this commentary represent a recommendation to buy or sell stocks. While he cannot provide investment advice or recommendations, he invites you to send your feedback --
to send him an email.