With the Federal Reserve finally cutting rates for the first time, the attention turns to how many additional cuts to expect, how deep the future cuts will be and what that means for us as investors. Indeed, tracking CPI, PPI and the other various economic reports we see every month matters. Traders instantly react to the data (sometimes wildly so), especially when the actual numbers are distinctly different than estimates.
However, the market in aggregate is a forward-looking mechanism, thus, prices will move in anticipation of an event or trend, sometimes way before said event or trend even starts to happen. The performance of the Utilities Select Sector SPDR (XLU) 2024 is the epitome of that. It is the best sector year-to-date.
XLU is a veritable "bond proxy." Thus, historically, XLU has been correlated with the direction of treasury bonds (which move in the opposite direction of bond yields). That's happened again this year, of course, and XLU has been a true leading indicator from a trading perspective.
Here's a chart with XLU and the TLT 20+ Year Treasury Bond ETF, which we're using since it's the most widely traded treasury bond ETF. From 2022 through 2023, XLU and TLT moved in the same direction more often than not. Both made key lows in October'23 and short-term trading tops in January'24.
.. In February, though, TLT continued to decline, while XLU exploded higher.
.. and it has continued to advance at a rapid pace.
TLT eventually followed its lead, but it didn't start.