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Intermarket Correlations in the Week Ahead

The markets waited anxiously for the symposium held at Jackson Hole, Wyoming that started last Thursday. Even though GDP data was revised lower and economic data continued to remain week, the markets reacted Friday to Fed Chair Janet Yellen’s comments that a rate hike case has strengthen in recent months as the economy approached towards the Feds employment and inflation goals. However, as you will take notice on the correlations chart below, the market reacted not once but three different times during the trading session. Initially the US dollar spiked higher while gold, US bonds, and the S&P 500 sold off, but only to reverse ten minutes later with gold trading at the highs of the session followed by US bonds and the S&P 500.

correlations yellen aug

This statement reversed market direction:

“On the monetary policy side, future policymakers might choose to consider some additional tools that have been employed by other central banks, though adding them to our toolkit would require a very careful weighing of costs and benefits and, in some cases, could require legislation. For examplefuture policymakers may wish to explore the possibility of purchasing a broader range of assets.”

In other words, the Fed is already factoring in a scenario in which a shock to the economy leads to additional quantitative easing, effectively increasing the current size of the Fed’s balance sheet.


Nevertheless,the Federal Reserve’s Stan Fischer surprised the markets only an hour later by mentioning of the possibility of two rate hikes this year, with one perhaps as early as September. Traders reacted again, sending gold, S&P 500 and the US bonds to the low of the session while the US dollar finished at the highs.
In the week ahead, I am expecting more volatility and more swings in price action. Intermarket correlations will be my primary focal point for trading opportunities.

Joe Rios -Rios Quantitative LLC

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