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Relentless Flattening of the Yield Curve and Powell Accelerated the Move

An intraday stock market rally attempt failed again today and the intraday selloff in bonds reversed as well to more flattening at the long end.
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Change in treasury Yield Since October 1 2021-11-30

October Change Synopsis

  • Since October 1, the yield on 3-year notes has gone up 32 basis points.
  • The yield on the 30-year long bond has fallen 26 basis points.
  • That is a relative flattening of 58 basis points, over double two quarter point rate hikes.

Powell Congressional Testimony

Yesterday, in testimony to Congress, Fed Chair Jerome Powell expressed concerns over inflation. 

He also stated it was appropriate to consider wrapping up tapering a few months sooner. Previously, the Fed's tapering target was June 2022.

Interesting Bond Market Reaction

One Day Change in Treasury Yield 2021-11-30

Yesterday I commented Stocks Decline as Powell Warns of Higher Inflation and Accelerated QE Tapering

The stock market reaction is what I would have expected on the above news. 

The bond market reaction is far more interesting. Yields at the long end tumbled and rose in the middle.  

Given news that the fed would taper (end QE expansion) sooner and then start hiking rates sooner, one would have expected a stock market decline (and been correct).

But if the economy was strengthening, bond yields would normally go up across the board. They didn't. 

Treasury Yields October 1 vs November 30

Treasury Yields October 1 vs November 30 2021-11-30

The lead chart shows the relative change and the speed at which things are happening. 

Retiring the Phrase "Inflation is Transitory" 

After insisting for over a year that inflation was transitory, Powell finally decided to throw in the towel. 

This brought out some amusing observations from economist David Rosenberg and others.

 Mind Change

Let's Get This Straight

Time for a New Measure of Inflation

Powell Broke the Market

What's Next for the Fed?

"You break it you own it. Coming up next, the Fed buys stock market indexes." 

Bonds Rip, Commodities Roll Over

"I mean, you have to love it. Powell drops 'transitory' just as commodities completely roll over and bonds rip. Keep on pivoting, Jay!"

The Next Phrase 

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"What will be the next phrase the Fed will regret"

I originally read that as "Next Phase" and was going with the idea of electrical bananas (a tribute to Donovan), or my above idea "Coming up next, the Fed buys stock market indexes."

Mellow Yellow

I like the graphics in that clip but mysteriously they stopped the video right before the key paragraph

Electrical banana
Is gonna be a sudden craze
Electrical banana
Is bound to be the very next phase

The question: "What was Mellow Yellow?"

When the song was released in 1966, everyone was convinced that it referred to a rumor that smoking banana peels would get a person high. (It doesn't work.) Donovan said that was never the case.

"I was reading a newspaper and on the back there was an ad for a yellow dildo called the mellow yellow," he said. "Really, you know the 'electric banana' was right in there and gave it away. And that's what the song's about."

The above from Donovan answers age-old question: What was 'Mellow Yellow?'

The Next Phase by the Fed is Uncertain 

Another Operation Twist is a good bet for the next phase. 

The next phase by the Fed is uncertain, but I am as convinced as ever that the expected dot plot of rate hikes is not that phase.

By the time the Fed gets around to being in a position to hike, the next recession is usually at hand.

The bond market agrees with my view. 

And stock market rally underway earlier today just faded so did a selloff at the long end of the yield curve. 

More flattening is underway as I type.

A Word About Fed Models 

Inflation models are worse than useless. They make central banks complacent.

For discussion of the Fed's useless economic models please see How Bad are Inflation Models, Expectations, and Forecasts vs Reality?

For a discussion of dot plots of rates hikes expected by the Fed, please see my September 22 post Fed Anticipates Rate Hikes in 2022 and 2023 - Fade This Consensus

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