Market Insights

Last month’s jump in interest rates triggered fears in the stock market, but some charts indicate the process may have run its course for now.

The moves occurred across bonds, oil prices and copper. Each of those may have reached levels where they’re due for a pause.

It’s important because higher interest rates often draw money away from large technology stocks like Apple (AAPL) and Amazon.com (AMZN). That can drag down the broader market and spur volatility. A calming of interest rates could stabilize those technology companies and the broader Nasdaq-100.

Crude Oil Chart

Energy prices matter because they’re highly sensitive to economic growth and impact inflation.

Crude oil futures (@CL) started climbing in November when Pfizer (PFE) reported positive vaccine news. That spurred hope travel would resume.

@CL paused around $50 in January before continuing past $60 last month. Now it’s returned to a downward-sloping trend line running between the peaks of October 2018 and early 2020. This could potentially slow its rally.

The fundamentals for oil may have also reached maximum improvement for now. Last week, for example, crude-oil inventories unexpectedly rose for the first time in more than a month. There’s talk of OPEC+ potentially increasing production at a meeting next week. Domestic production, measured by the Baker Hughes Rig Count, is also back to a 10-month high.

Bond Chart

The 30-year Treasury Bond Yield has followed a similar path as energy. It also peaked on February 25 at its highest level in 15 months. Additionally, the iShares 20+ Year Treasury Bond ETF (TLT) briefly dove beneath its March 2020 low before snapping back. (TLT moves in the opposite direction as yields.)

Both of those reversals suggest the move may have run its course for now.

Additionally, the yield curve between two- and 10-year Treasuries widened to 1.37 percentage points. That was its highest reading since November 2015.

Copper Chart

Copper futures (@HG), like oil, are highly sensitive to the global economy. They also rallied from long-term lows and peaked at 4.3755 on February 25 — slightly above a high from nine years before. However prices quickly retreated, another sign of frenzied buying.

These three charts highlight the dramatic improvement in economic sentiment that took place last month. The biggest worry is that inflation will spike as business returns to normal. But is that a real fear?

Federal Reserve Chairman Jerome Powell has downplayed the risk, telling Congress last week that overall price increases are “soft” and “below our 2 percent longer-run objective.” He reiterated his pledge to keep short-term interest rates low.

Second, it’s important to remember that the social lockdowns created slack in the economy. About 10 million Americans remain out of work and capacity utilization is 1.5 percentage points below its pre-pandemic levels. There are some bottlenecks and price pressures in certain areas — especially manufacturing. But output and productivity will likely rebound as things return to normal.

Inflation and Earnings

Finally, companies have adapted to the circumstances and managed to grow earnings last quarter. Factset reports that profit estimates for the current quarter rose 5 percent since the start of the year. It’s the second most aggressive upgrade in 18 years, potentially giving some cushion against cost pressures.

In conclusion, the recent spike in commodities and interest rates anticipated significant improvement in the economy. However a lot of the good news may be priced in. This could let the panic ease and help calm return.