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This week’s FOMC meeting is going to be one of the most interesting ones in years, because of the new Federal Reserve Chairman. Will he hike rates in the face of rising inflation or stand pat, because President demanded that he lower rates two weeks ago, and the Treasury Secretary has been buying more Treasury bonds to try to stop long-term bond yields from rising.

Yes, yields on treasury bonds have been rising since the start of Trump’s war against Iran.

This is a chart of the 2-year bond yield, and as you can see it is now over 4.63.

It’s not just the war making yields go up, but the rapidly rising government debt, which passed the $40 trillion mark a few weeks ago.

Historically, the Federal Reserve has followed the two-year bond yield in raising rates.

The Fed Funds futures are placing the odds of a rate hike at this week’s FOMC meeting at 87.3%, and now are pricing in another hike by year end.

Of course, this is all due to rising inflation, and last week the commodity research bureau index hit a new high for the year.

If you can recall, I wrote about buying commodity ETF’s, like PDBC and PDBA a week or two before the start of the Iran war.

However, again it’s possible that the Fed does not lower rates this week.

That would seem like an incredible mistake, though.

In fact it could make foreign investors sell bonds and the US dollar, because that is what they did back in June after Kevin Warsh’s first Fed meeting.

I think they will likely raise rates, but just keep that possibility in mind.

So far, the stock market has held up, despite all of the negative action in the bond market, with the S&P 500 closing Friday above it’s 50-day moving average, however the internals of the market have been fading, as you can see from the advance decline line.

If the S&P 500 were to close this coming week below it’s 50-day moving average I think that suggests that the stock market averages will follow the weakness in the advance/decline line down a bit.

Gold still appears to have put in a new major bottom in July around $4000 and had a nice rally in August, but don’t be shocked if it doesn’t drift a bit in a range with $4200 as support and the $4700 area as resistance.

The good news for gold is that the GDX/GLD ratio had a nice move up in August and this ratio is still standing firm.

This suggests that any weakness in gold will be temporary, because this ratio tends to signal a bull trend when it rises.

This is how some of the key charts are lining up as we start this week.

-Mike

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