The 10-year rate ended the day in a particularly interesting position, given its significance in the broader financial landscape. It closed at 3.81%, just above the August 5 close of 3.79%. The 3.8% level has been a key point since the start of the year. When it first reached this level in late December, it quickly bounced back. This is a crucial level for the 10-year rate because if support at 3.8% breaks, it could potentially lead to a drop in the rate down to around 3.30%.

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Tomorrow, we’ll see the job revisions through the end of the first quarter, and there’s some concern that the number could reveal as many as 1 million jobs less were created over the past year. While it’s uncertain, the movement in the 10-year yield suggests the market is anxious about this data. This puts us on a yield curve steepening watch as the 10-2 spread continues to consolidate around the -15 basis points region. More importantly, it is likely that 10/2 is heading over the next few months, based on current trends.

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The weakness in the dollar index also suggests that the market is nervous about the upcoming data and the data expected at the start of September.​

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Typically, falling rates, a steepening yield curve, and a weaker dollar point to rising recession risks. Right now, the market is signaling these concerns. This is why we’re observing a weakening state in both the bond and FX markets. If the bond and FX markets were optimistic about the economy, the 10-year yield wouldn’t be falling, and the dollar wouldn’t weaken.

This dynamic also strengthens the yen against the dollar, with the USDJPY falling back to 145.25 over the past few days. Interestingly, the stronger yen hasn’t yet impacted the equity market, likely because the Nikkei 225 and Japanese markets have remained stable.

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I suspect that if the markets in Japan start getting rocky again, the US markets will begin to feel the effects. This afternoon, Nikkei futures are trading down about 1.4%. Generally speaking, a strong yen isn’t favorable for Japanese stocks. So, if the yen continues to strengthen, it’s likely that the Nikkei and other markets will follow it lower.​

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When you compare the Nikkei and the Nasdaq 100 in JPY terms, their charts are nearly identical. They have followed almost the same market twists and turns since 2021 and even further back than that.​

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The key point is that the USDJPY closely tracks the 10-year Treasury rate. If the 10-year rate is at a critical support level and breaks lower, the USDJPY is likely to follow suit, which means the USDJPY could be heading lower as well.

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By the way, Nvidia (NVDA) stopped at $130 because that is where the gamma was heaviest for the week.

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(BLOOMBERG)

Anyway, something to consider ahead of tomorrow’s jobs revisions, the FOMC minutes, and Jackson Hole on Friday.

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