By Marc ChandlerThis post first appeared on Marc to MarketInvestors are seeing turmoil in the capital markets and a decline in US interest rates, including at the short-end. Some are suggesting that market has become less confident of…
Policy divergence is the driver of market vulnerabilities. The longer the US stands alone in tightening policy, the greater the stress on the financial system.
Job growth has now begun a slight re-acceleration. If this trend holds, the unemployment rate will drop into the mid 3% range and the Fed will move to a fourth rate hike. The mix of continued job growth, tightening monetary policy, and late…
At least initially, rate increases can be procyclical. Moreover, in this particular cycle, fiscal and regulatory policy are acting procyclically too. That means you need a lot of rate hikes to get a big anti-cyclical effect.
The yield curve has steepened to where 10-year yields exceed 2-year yields by 52 basis points. While this may seem like a case of market whiplash, it's not. It's what should be expected in a late cycle rate hike regime.
We should expect the Fed's tightening to continue. But a lot of the recent incoming data has been soft. And while this may just be a blip, I expect the curve to flatten further by mid-year.
The possibility of the Fed causing the curve to invert is real. We will have 12-18 months at most to see what happens economically.