These charts seemed worth writing up. Key is 10 year bond yield minus the 2 year bond yield. Have a look. That is some crash (especially that last leg down). Getting back to 2019 lows.
Explainer. This is a measure of the “yield curve.” It is roughly a proxy for future economic growth. If 10 year money is paying a lot more than 2 year money, the market is expecting strong economic growth. When this number “inverts” (10 year pays out less than the 2 year) that is an almost foolproof recession indicator. If the number is going down, expectations are going down…
Does this spell “runaway inflation” to you? Or does it say “the Fed is almost done and we’ve all learned the natural rate of interest is scary low because we have a soggy low-growth economy.” We already learned this lesson back in 2018 last time the Fed tried to hike rates. They raised a few times until the 10 year rate went DOWN – the market telling us that any more raises would choke off growth.
Is the economy that different from 2018 2019? If anything, it is weaker. Fewer participating workers and higher inventories are both drags vs 2019.
Maybe the market is wrong? Reasonable argument to make, but I’d argue that chattering classes “consensus” is Inflation is out of control!!!! There is a lot of talking head commentary to that effect. So the market is mostly refusing to confirm what “everyone” is saying. In cases like that, the market is usually seeing further ahead than the chatterboxes.
The bigger worry is that lower demand, driven by higher prices and not-equally-higher-wages, stalls us. Which would be consistent with that flattening yield curve. And basic market economics. Which a lot of people also seem to have lost faith in lately. Apparently people will just keep paying ever-higher prices forever drawing down on some previously unseen source of funds. OK, they can borrow against newly re-valued houses, but…
Chart 1 – 10 year minus 2 year
https://fred.stlouisfed.org/series/T10Y2Y
Also A Bonus Look at Real (Inflation Adjusted) Yields. Inflation Expectations Aren’t Driving Rates…
https://fred.stlouisfed.org/graph/?graph_id=983261
