Here we have the Yield Curve: Treasuries are shown from lowest duration (US03MY) to highest duration (US30Y). Normally, the lowest duration treasuries yield the least (least) and the highest duration treasuries yield the most (riskiest). However, now the 3-Year Treasury yields more than the 5 year, 10 year and 30 year. The Fed has decided on a hard landing and is willing to cause a recession to combat high inflation. The more the Fed tightens to combat inflation (higher short term rates), the more they hurt future economic growth (lower long term rate). Watch for short term treasuries to continue their ascent up to Fed's Terminal rate of 3.8% while, long term treasuries move up at a much slower pace. Long term rates will rise if Inflation turns out to be sticky.However, The US10Y will peak before SPY/QQQ/DJI as, this will signal an end to long term inflationary pressures.
Even though, the fed retired the use of transitory. They still believe inflation in the long run will return to the long term inflation rate of between 2% and 2.5%. On June 13th, data came out from the University of Michigan Consumer Inflation Expectation Survey citing expectations of higher long term inflation. This prompted/allowed/forced the Fed to take a more hawkish/less accommodative stance because, the fed is heavily opposed to higher long term inflation expectations. The fed's credibility to fight inflation goes down when long term inflation increases and does not align with the fed's narrative of a future with low inflation. The fed's ultimate goal is to combat inflation but look at this unruly, inverted mess they have made.....
The best way to understand the Fed's plan is to look at their Economic Projections. https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20220615.pdf . The Fed is expecting a terminal/final fedfundsrates of ~3.8% in 2023. The fedfundsrate currently sits at 1.5,1.75%. The fed considers a rate of 3.8% to be restrictive as it is higher than their long term target inflation rate of 2% - 2.5%. The Fed projects PCE inflation to fall from 5.2% in 2022 to 2.6% in 2023. A 50% drop in inflation is expected as they raise the terminal rate to 3.8%. This will come with a increase in unemployment. The fed is getting serious about taming inflation and "bringing demand into better balance with supply". The fed attributes the large PCE readings of 2022 to supply constraints, strong aggregate demand, covid and the war on Russia. The fed looks at inflation and still sees these threats as short-term. But, even during the 1970's inflation was caused by supply constraints (i.e Gulf War).
The last round of QE which started in 2018 when President Trump demanded rate cuts to stimulate the economy and weaken the Dollar. In 2018, Short Term Real Interest Rate were positive due to inflation being at very low levels of 1.8%. (Short Term Real Interest Rate is determined by FedFundsRate minus the Inflation Rate). When Real Rates increase financial conditions become tighter and credit becomes more expensive with respect to inflation. Historically, Short Term Real Interest Rate remain slightly negative compared to the longer term one but, both were positive in 2018. In order for contractionary police to be effective the FedFundsRate needs to be lower than inflation. In 2023, the Fed's projection show 3.8% fed funds rate and 2.6% PCE Inflation. Thats a positive real interest rate! This why it is so important for the inflation rate to go down by 2023 and for long term inflation to return to the fed's target of 2%. Markets will be listening close for signs of peaking inflation.
US bonds are the most liquid instrument in the world. Liquidity dictates market movements and since 2008, the fed has provided ample liquidity to drive asset prices. However, Quantitative Easing works well in non-inflationary environment. Covid and the following stimulus was a positive demand shock as, we saw stimulus and higher asset prices leading to higher aggregate demand and the formation of an asset bubble. But there was also a negative Supply shock BOTH leading to higher price levels. The fed's only weapons to combat markets is the fedfundsrate and their rhetoric (hawkish/dovish narratives). Now the fed is raising rates and has taken a hawkish stance. Liquidity will dry up as, credit gets more expensive. Asset Prices will soon align with the expensive credit. Cash becomes more valuable as, the savings rate rises. There will be no remorse nor recourse.......
Comment:
further volatility in the bond market is expected.:
Comment:
ANOTHER RECESSION SIGNAL:
We are looking for the 2 year yields to peak and come down as, this signals rate cuts. when the fedfundsrate reaches the same level of US02Y; we will be in the midst of a recession.
We are looking for the 2 year yields to peak and come down as, this signals rate cuts. when the fedfundsrate reaches the same level of US02Y; we will be in the midst of a recession.
Comment:
BTC and Real Yields???
www.tradingview.com/...0-000-Frail-Support/
www.tradingview.com/...0-000-Frail-Support/
