Expectations for a quarter-point Fed increase by December have eased over the past eight days, and the Dow Jones Industrial Average has drifted lower: it traded near 53,400 on Tuesday, down about 105 points on the session and roughly 2.5% below the August 5 record just short of 54,750. Conditional meeting pricing shows a 65.4% probability of a hold on September 16 and 52.4% on October 28, while the December 9 hold stands at 33%; on August 10, that December meeting had an increase priced as a certainty. Despite reduced tightening odds, the 30-year Treasury yield is around 5.3%, its highest since June 2007, as term premium rises; Japan’s 10-year is at a three-decade high, Germany’s 30-year is at its firmest since 2011, and France’s 30-year is at levels unseen since 2008.
US housing data pointed to stress at the long end: July building permits ran at 1.443 million versus a 1.37 million consensus, but starts printed 1.239 million against 1.35 million expected and 1.415 million prior, while pending home sales fell 2.3% in July versus an expected 0.3% gain. Home Depot rose around 1% after a second-quarter earnings beat, limiting the index’s session loss to about a fifth of a percent under price weighting. In commodities, crude traded above $85 after a near 1% Tuesday gain following a Monday rise, as Washington said no Iran talks are underway and the naval blockade remains in full, after a prior threat against Oman. The week’s calendar includes FOMC minutes on Wednesday at 18:00 GMT from the July 28-29 meeting, where three Reserve Bank presidents dissented for a quarter point; Thursday brings jobless claims (210K consensus, 209K prior) and the Philadelphia Fed survey (25 forecast, down from 41.4), while Friday’s preliminary August PMI readings are seen at 53.8 for manufacturing versus 53.9 and 54 for services versus 54.6.
Bearish Outlook for Equities and Bonds Amid Rising Yields
We suggest derivative traders adopt a bearish bias on equity indices over the coming weeks, particularly focusing on short positions on the Dow Jones Industrial Average as it struggles below its recent peak of 54,750. With the index failing to secure a new high for over nine sessions and trading around 53,400, we expect further downward pressure toward the 53,000 support level. If we break below 53,250, we should look to hedge equity portfolios with put options, targeting the 50-day exponential moving average near 52,400.
This bearish outlook is heavily driven by the long end of the curve, where the 30-year Treasury yield has surged to around 5.3%, a level not seen consistently since the 2007 financial crisis. The rising term premium is punishing growth and cash-flow-sensitive assets, proving that global bond markets in Germany and France are also demanding higher yields to hold long-term debt. We advise traders to position for persistent volatility in the bond market by utilizing interest rate swaps or options on long-term Treasury ETFs to benefit from this rising term premium.
Sector Recommendations: Housing Weakness and Energy Strength
We also see weakness in the housing sector, as July pending home sales dropped 2.3% and housing starts missed expectations by over 8%, showing that builders are hesitating to break ground. Derivative traders should consider shorting homebuilder equities or buying puts on housing sector ETFs, as these companies cannot escape the pressure of high 30-year mortgage rates. Despite temporary relief from retail earnings, the underlying housing data suggests the consumer is buckling under high borrowing costs.
In the energy space, we recommend holding long call options on Brent or WTI crude oil as prices trade firmly above the $85 handle. Geopolitical tensions, particularly the threat of disruption in the Strait of Hormuz and a strict naval blockade, are raising insurance costs and shipping risks. This supply-side risk makes energy a crucial hedge, as any sudden escalation will drive crude prices higher and further stoke sticky inflation.
Looking ahead to the rest of the week, we should prepare for heightened market swings surrounding the upcoming FOMC minutes and preliminary PMI data. If the manufacturing PMI dips below the forecasted 53.8, it will confirm a slowing industrial sector alongside rising yields, a classic stagflationary signal. We will monitor the 53,800 level on the Dow closely, as a daily close above this resistance would invalidate our bearish stance.
