End of week Commentary…looking Deeper into the Interest Rate Scene

I am kind of coming out of a six week early summer vacation mode for a few weeks, this is before the late summer August-October vacation mode. This leaves a couple of weeks to dig into the models and see what is cooking.

Something is happening that I don’t think the Bond Guru’s have quite got their arms around yet. Maybe it probably would be beneficial to take a look at the 30-05 year yield curve which Alan Greenspan always said gives the truest picture of the overall economy. The 30 Year involves long term inflation trends while the 5 year is somewhat isolated from FED 90 day FF rate activity. So the 30-05 shows the relationship between long term and short term inflation isolated from the Old School FED games.

I say isolated from Old School FED games because I see FED Chair Warsh as being a New School player. As it became apparent around September 2025 that Powell’s grip on things was going to change and then in April 2026 as the rollover into Warsh’s term was falling in place we saw two stages of the 30 year losing to the 5 year. Powell came out of corporate America where everyone thinks FF rates govern the economy, while Warsh basically came out of Academia which understands that the 30 year is the measure to watch, it is where inflation is measured.

See Chart here.

You will note recently, June 18-July 15, that there was a dead cat bounce in the 30-05 relationship as the Old School players saw the Iran Escapades as leading to long term inflation. I see this abating soon as the world continues to be educating itself in how to live with less oil and be more green. I don’t see FF rates changing for the rest of the year, with all the liquidity being forced into the markets through FED Deficits there is no need to borrow that much or mess with short term rates, but I do see long-term rates declining for the reasons I mentioned in yesterday’s post on how Corporate America gamed higher margins into their operating plans after Trump was elected and how that will be reflected in Year over Year comparisons of CPI and PPI for the rest of the year.

So, what is going to drive stocks up into the elections ?

This past week has seen a lot of testing of the upside breakout that occurred in the April 20th – 30th time period. That is good, I think we now finally are seeing a decent sized short commitment lodged in the market, that will fuel short covering, something we have not seen since the spring lows.

Back to the drivers:

1. We know it will not be short term Fed Fund rates.
2. And a declining interest rate yield curve is historically not a big driver of the stock market as stock traders tend to ignore the long rates, like 30 yr bonds, which, yes, 30 Yr bonds now make sense in a portfolio.
3. AI stocks for the moment are defanged a bit, but their influence will not die.
4. This leaves four stock drivers in my book,
5. a) an unexpected by the market further big decline in gold, silver, and probably Bitcoin.
6. b) an unexpected big decline in the Dollar down the road, coinciding with a Gold bottom in the low $ 2000’s, as confidence in US Government erodes.
7. c) a decline in Oil prices
8. d) Continued liquidity fueled by government defense spending.