The market is keenly anticipating the CPI print later today. Whilst it is not the preferred metric the Fed uses, it will still give us an idea if inflation is moderating or not. This dynamic, in turn, affects the path of monetary policy, which is a crucial input of real rates (top chart).
In our view, real rates currently have a ripple effect on the intertwined relationships within the market. For example, our middle chart shows the relative strength between the weekly US30 and the NAS100 (RS1). RS1 suggests that the value-oriented US30 outperforms the growth NAS100 index when real rates rise under current macroeconomic conditions. To this end, the correlation coefficient (bottom indicator) of real rates to RS1 is a strong 0.74.
Thus, we infer that any effect the CPI release has on real rates will filter through to RS1. This assumption makes sense, given that the NAS100 has a higher sensitivity to interest rates due to its time value of money function.
Senior Market Specialist
Russell Shor joined FXCM in October 2017 as a Senior Market Specialist. He is a certified FMVA® and has an Honours Degree in Economics from the University of South Africa. Russell is a full member of the Society of Technical Analysts in the United Kingdom. With over 20 years of financial markets experience, his analysis is of a high standard and quality.