US real rates drive everything in markets right now, and if they are going up then so is the USD, while equity will head lower – for context, the 1-month rolling correlation (assessed by value, not percentage) between US 10-yr real rates and the USDX sits at +0.94 – so there is an incredibly strong relationship.
This is also true of equities, where the US real rate (we deflate the 10yr Treasury for expected inflation) holds a rolling 1-month correlation with the US500 of -0.92 and NAS100 -0.89.
It sounds pedantic that one day makes a difference, but the default setting for 5 and 10yr US TIPS/real rates on TradingView, which the source a feed directly from the St Louis Fed (FRED) website – comes under the code DFII10 – as per the FRED website this, however, has a two-day lag, so the benefit to traders is reduced.
We can see the breakeven component of real rates on TradingView (10-year breakeven, or the expected US inflation rate to average over the coming 10yrs – code = T10YIE) actually holds no lag, so we can now use this to create a more up-to-date US 5 & 10-year ‘real’ Treasury rate.
So there work around - In the search function simply subtract T10YIE from the US 10yr Treasury (US10Y) and you can get a real-time real rate – type TVC:US10Y-FRED:T10YIE – this is the 10yr real rate, but you can change it to TVC:US05Y-FRED:T5YIE for the 5-year.
Higher real rates act as the true cost of capital – they are the handbrake on economic activity that the Fed need to be more cognisant of than anything. If 10yr real rates are going to 1%, and if this relationship holds, then I think the DXY re-tests the 15 June highs, although we are seeing real support for EURUSD, and the US500 likely heads to 3400 – 3200.
It's here where most see a trough in the market and where we bake in a true recession – not just a technical one, but one where we see broad-based layoffs. As it is, a recession is certainly probable, but will the economy talk itself into something far more pronounced that really impacts consumption?
Global risk Warning CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 74-89% of retail investor accounts lose money when trading in CFDs. You should consider whether you understand how CFD
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