Following the Path

• US stocks were mixed in the afternoon trading, as market reacted to latest round of earnings and a dip in bond yields.

• The S&P 500 edged higher by 0.1% and the Nasdaq advanced 0.7% while, the Dow Jones fell more than 150 points, dragged down by declines in IBM, Honeywell, and Boeing, with only 12 of its components gaining.

• UPS gained 4.8% on strong earnings and an improved full-year sales outlook, and ServiceNow jumped 4.7% on robust subscription revenue and a raised forecast.

• In contrast, Boeing slipped 1.6% after its largest union rejected a labour deal, extending a production-disrupting strike.

• Honeywell dropped 4.7% as sales missed expectations despite solid profits, and IBM slid 6.8% due to revenue falling short of targets.

We've talked this week about the sharp move higher in bond yields.

The market has effectively reversed the Fed's September interest rate cut. And as we observed in my note yesterday, the futures market positioning is at extreme levels (leaning heavily toward the view of even higher yields).

Is the market right? Has the Fed mis-calibrated with its September cut and the projected easing cycle?

Let's take a look at a leading indicator for the 10-year Treasury yield (top panel). It's the copper-gold ratio (bottom panel).

The ratio of copper prices to gold prices tends to trade tightly with the 10-year yield. Historically divergence between the two has resolved with the 10-year yield closing the gap (i.e. following the path of the copper-gold ratio).

That said, we get the November Fed decision in two weeks, just following the election. The expectations are for the Fed to follow its half point rate cut in September with a less aggressive quarter point cut in November.

But the level of rates remains in highly restrictive territory (putting downward pressure on the economy) and this sharp rise in bond yields has effectively tightened financial conditions since the last meeting.