Welcome back to MktContext where we study the US economy and time the stock market.
Current stock market timer: BULLISH
A tug-of-war between equities and bonds drove sharp volatility this week.
On one side, a renewed war with Iran pushed oil prices higher, triggering a breakout in long-term interest rates. The 10-year rate surpassed 4.75% to highs not seen since 2023. High rates are a headwind for stocks.
On the other side, investors are attempting to anticipate the Fedās next move amid limited forward guidance. While Fed officials signal dovishness, economic data contradict their messaging (more on this later).
āRecent data suggest we are finally seeing some signs of disinflationā¦ā
āIf this continuesā¦ I would be inclined to support holding the Federal Funds Rate at its current setting.ā
-Fed Governor Chris Waller
Rising interest rates are a global phenomenon. Major developed nations are seeing multi-year highs (Japanese rates at 1996 highs; French rates at 2008 highs; German and Australian rates at 2011 highs). Because global interest rates move in tandem, international upward pressure is reinforcing higher US yields.
We maintain our view that the Fed will not hike in Sept nor the rest of 2026. That does not mean stocks rise in a straight line. If bond investors believe the Fed is too permissive on inflation, long-term yields will climb further, causing market volatility .
The market indecision/confusion is clearly reflected in the āspinning topā candlestick on the weekly SPX chart:
Hereās what it means for stocksā¦
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No end to Iran war
Macro-economic pressure
Chips vs software (fresh breakout)
Technicals and new portfolio changes
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