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The S&P 500 fell today by about 50 basis points, with the Nasdaq down roughly 65 basis points. PPI came in slightly hotter on the headline numbers, but as I reviewed with members earlier, if you strip out the components that feed into the PCE report, nearly all of those metrics were lower than last month. This has led some analysts to believe that core PCE may not be as strong as previously anticipated, which helped push yields slightly lower to start the day.

This morning, The ECB rate decision caused rates in Europe to fall, as the statement was interpreted as dovish. However, following the press conference, rates in Europe rose sharply. Notably, the Italian-German 10-year spread increased by about seven basis points to 1.13%. This move may have received little attention, but it is significant. Spreads tend to move in tandem, and the Italian-German spread reaching levels last seen in late 2021 or early 2022 is noteworthy. Today’s considerable increase could signal the beginning of a bottoming process in credit spreads.

European rates closed higher, with Italian 10-year yields rising by 14 basis points and German 10-year yields by seven basis points. U.S. 10-year yields also rose following a weaker-than-expected 30-year auction, ending the day at around 4.33% to 4.34%. This level is essential, as the 10-year yield closed just above a key trendline and horizontal support at 4.34%, suggesting a potential breakout toward 4.75%. Over the long term, nominal 10-year yields could trend as high as 6%.

We’ll get import-export price data tomorrow, with retail sales coming Tuesday and the FOMC meeting on Wednesday. The Fed is expected to announce a rate cut, but the dot plot may lean more hawkish, potentially pushing rates higher.

U.S. two-year inflation swaps rose by one basis point to 2.61% today. While still below 2.7%, a sustained rise above that level could shift market expectations toward potential rate hikes in 2025 rather than cuts. Two-year inflation swaps have historically been a leading indicator of Fed policy direction.

The U.S. dollar strengthened by 34 basis points today, with key resistance on the dollar index at 107.25. A breakout above this level could push the dollar index back toward 109, a significant move, as the dollar has not been above 107.25 since late 2022.

In equities, the S&P 500 declined by 54 basis points, with market breadth showing continued weakness. The relative strength index (RSI) is trending downward, and the advance-decline line is falling, suggesting liquidity strains are beginning to appear in equity markets. Support for the S&P 500 lies around 6,000, with additional support at 5,860 to 5,690. Resistance may be near the upper Bollinger Band at approximately 6,150.

I will be back on Sunday.

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