2-3 Year Treasuries May Be Signaling a Pause In Rate Hikes after December
The 2 charts below show important developments in 2 & 3 year Treasury yields (See charts 1 & 2 below):
- While longer-term uptrends in yield remain in place…
- Shorter-term uptrends in yields are breaking
Inflation Expectations: Watch Out Below!!!!! Note to Fed - Don't Keep Tightening
Fed policy may be too restrictive. Yesterday was notable because the belly of the Treasury curve is outperforming the wings.
Markets to Fed: Slow Down - Central Bank Policy Risk Rising
After a brief stock market surge following the midterm elections (gridlock in Washington is viewed as positive for markets), optimism was vanquished by pessimism. The dark clouds of a sterile FOMC statement and the grim news that oil has entered a bear market contributed to this shift in outlook. The intraday chart below shows the S&P 500 for the week – note the gap up after the election.
2018 Midterm Elections: Divided Congress
As predicted in the polls and widely expected in the marketplace, the highly-anticipated midterm election results revealed that the Democrats were indeed able to take control of the House of Representatives, while the Republicans retained control of the Senate. However, the power of Trump is still alive and well as the Republicans made significant gains in the Senate, especially where the President campaigned.
The TIPS/Dollar Tug of War and What It Means for Stocks
The US dollar, as measured by the US Dollar Index (DXY) is at the top of a trading range that has been in place since the start of this year (chart 1). In fact, it is threatening to break out of the top of this range. A stronger US dollar has been linked to recent equity market volatility in part because of the way that it destabilizes emerging market economies.
Time Matters: Yield Curve Slope, and Stocks
Investors spend a lot of timing looking at the slope of the Treasury curve for hints about the future direction of the economy and risk assets like stocks. Standard thinking is that a flatter curve likely leads to a slowdown as a small spread between short and long rates impacts credit creation and lending to the private sector; conversely a positive or steepening yield curve can signal better times ahead.
Nervous Markets
Once again, volatility has reasserted itself at levels not witnessed since the February market rout. Nervous investors have fled indiscriminately from risky assets amid fears that rising interest rates will erode global growth, corporate profits, and equity valuations - while ongoing trade tensions between the world’s two largest economies and tightening financial conditions have also battered sentiment.
Markets to Fed: Slow Down
The Fed last raised rates on September 26th and stocks have been falling ever since as the chart below shows. Gains in large cap stocks have been largely erased for the year, international developed markets are meaningfully lower for the year, EM is down significantly, and only NASDAQ holds on to gains that are notable.