Wednesday's Market Minute: Two Key Charts to Watch Around Inflation

With the US dollar continuing a three-month slide, stocks are trying to respond with strength. This is generally what you would expect based on last year's relationships, but lately those correlations have been getting messier and it's not quite obvious yet that a lower dollar is a surefire bull case for stocks anymore. That's because treasury yields have not been following the dollar as closely lately, and stock investors seem to be getting more worried about recession than inflation. If 2023 is going to be more stagflationary than 2022, one could see a regime in which interest rates remain elevated but the dollar slides as the U.S. economy falls behind. 

So I'm not sure the dollar is going to be as helpful an indicator going forward.Instead, there are two well-established levels on two other very important charts that I'm watching around inflation tomorrow.

The first is the 10-year yield, of course. It looks like 3.5% is now a pretty clearly important level. It was the high rate last summer, was a key juncture on the way up, and held last month as investors bought bonds and tried to push interest rates down. After bouncing off it, we're pretty much back there. If CPI causes bonds to rally and the 10-year to fall below 3.5%, it likely means yields will indeed follow the dollar, and that could mean we're headed back to 3%. 

Whether or not a big drop in yields is bullish for stocks will depend if the "peaking inflation" message can remain distinct from a narrative about a slowing economy. For that, I turn to bitcoin. I think it still should act as a gauge of risk tolerance, and if investors indeed believe interest rates are set to drop, they'll likely take one more stab at buying the worst of the beaten-down assets. For bitcoin, the level is $18,500. It was clear support last year before breaking around FTX -- if the coin gets back above there, look for another bear market rally in risk assets.

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