Rising Rate Expectations Add To Changes In Market Sentiment

I have become accustomed to a relatively predictable reaction to moves in the market’s expectations for rate hikes from the U.S. Federal Reserve. Last week began in the wake of the market finally bringing its expectations for the next rate hike back into 2016. The cascade of impacts from there were predictable: a stronger U.S. dollar index (DXY0), a drop in iShares 20+ Year Treasury Bond (TLT), and a (slight) decline in SPDR Gold Shares (GLD).

Something a bit different happened this past Friday, March 4, 2016 after the U.S. reported its jobs numbers for February. Rate expectations were pulled into September as part of what is now a trend of earlier and earlier expectations for a rate hike.

Expectations for the next Fed rate hike are rapidly moving earlier and earlier into the year.

Source: CME Group FedWatch

Instead of strengthening during the week along with rate expectations, the U.S. dollar spent its time weakening. The index even closed the week retesting support at its 200DMA.

The U.S. dollar index continues to churn between its 50 and 200DMAs

TLT dropped big to start the month. While it dipped on Friday in response to the jobs report, it bounced off its lower-Bollinger Band (BB) and failed to closed off the low of the week. I decided to use this dip to add to a tranche of call options on TLT. My trades here have simply played TLT’s strong uptrend for this year.

iShares 20+ Year Treasury Bond seems to be cascading toward a retest of 50DMA support. However, Friday’s close suggests it may be ready for another bounce first.

The SPDR Gold Shares continued its resilience. GLD rose through the week and even went higher on Friday before fading into a slightly negative close. Given the surging rate expectations, I would have expected GLD to fall. I guess the dollar’s weakness helped gold stay aloft.