Potential top of hiking cycle sees real yields decline, pressuring the USDOLLAR and supporting stocks

  • SPX500

The Real Yield

Yesterday, the Federal Reserve kept interest rates on hold for a second consecutive meeting. Chair Powell recognised that inflation is slowing as opposed to emphasising how strong growth has been. Whilst keeping the door open for further hikes, there is a strong possibility that this rate hiking cycle has peaked. As such, the real yield dropped yesterday by 7.5% to close at 2.32%. It has dropped further today and is currently yielding around 2.29%.

In a previous article we detailed the failure swing on the real yield weekly chart, positing that it suggested that we were near the top of the Fed's hiking cycle. There has been more progress in the chart that suggests this.

The 10-year real yield is looking to close below last week's low (black horizontal line). Moreover, last week's candle is a reference candle (blue arrow), i.e., it has candles with two lower highs on either side of it. If the real yield does close below last's week's low it will suggest, at least, that an interim high is in place for the real yield.

Source: www.tradingview.com

The Real Yield and the USDOLLAR

Interestingly, the correlation coefficient between the real yield and FXCM's USDOLLAR basket is a robust 91%. This suggests that the real yield has been a key driver of the greenback. Now that the real yield has started to show signs of moderation, we are looking to see if the USDOLLAR follows suit. A close below last week's low (green horizontal line) may suggest that, at least, an interim peak is in for the basket.

Typically, the dollar is considered as a safe have, and if it has peaked it may bode well for risk assets such as stocks.

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The Real Yield and the SPX500

Source: www.tradingview.com

When considering if stocks may benefit, we note that the correlation coefficient between the SPX500 and the 10-year real yield is a strong -81%. This makes sense because higher borrowing costs are associated with falling share prices. Now that there is a potential peak in yields, and the dollar safe haven is looking toppy, the SPX500 may present value at current levels.

Last week's SPX500 candle may be a bullish reference candle (green arrow). I.e., it has candles with higher lows on either side of it. This corresponds with the real yields bearish reference candle (blue arrow). If the SPX500 can close above last week's SPX500 high (green horizontal line), it may suggest that, at least, an interim trough is being charted.


Typically, the real yield has been a key driver of flows into havens or risk instruments, depending on its direction. It seems as if we have hit a top in the rate hiking cycle. This, is turn, may suggest an apex for the US 10-year real yield and a nadir for the SPX500, at least for the interim.

Russell Shor

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.

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