Yield Curve Inversions Vanish in Violent April Steepening, What’s Going On?

April 17, 2022

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12:52 am

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28 comments

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Economics

Yield curve data from New York Fed, chart by Mish.

What’s Going On?

It’s typical for the yield curve to invert before a recession then steepen as the Fed takes action, but that’s not what’s going on here.

Rather, the market is pulling back expectations for the speed of Fed tightening.

The market is also beginning to digest the idea that perhaps the Fed will not be aggressive with Quantitative Tightening (QT).

Brainard Then and Now

On April 6 RIA reported Lael Brainard Scares Investors with QT
On April 14 (PAYWALLED), MNI reported Lael Brainard said the Fed could begin rolling off assets as soon as June [Not May].

Brainard is the Fed’s Vice-Chair so that opinion carries weight.

Faster Quantitative Tightening? Not Anytime Soon Says Fed Governor Christopher Waller

Also recall my March 25 post Faster Quantitative Tightening? Not Anytime Soon Says Fed Governor Christopher Waller

Beware of a Very Aggressive Steepening of the Yield Curve by the Fed

On March 15, I reported Beware of a Very Aggressive Steepening of the Yield Curve by the Fed

That was not my opinion but that of Joseph Wang and Harvey Bassman who proposed the Fed would steepen the curve via aggressive QT.

Many people expected the Fed to be aggressive with QT starting with the May meeting. I was not one of them.

The curve steepened because the odds of aggressive QT is slipping.

Those who called for steepening appear to be correct for the wrong reason. Once the Fed starts hiking more aggressively, the inversions will reappear.

This maneuver does not mean no recession. It’s mostly irrelevant. There will be no soft landing.

This post originated at MishTalk.Com.

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CRS65

2 years ago

It appears to me that the Fed is essentially playing chicken with inflation expectations. I believe that the Fed is still largely hanging onto the premise that much of the above trend inflation that we have seen over the last 12 months is “transitory,” and that the transition back to more modest levels of inflation (2-2.50%) is simply taking longer than expected in the middle of last year. However, the Fed recognizes that this longer high, but transitory inflation risks the psychological effect of morphing into a self-fulfilling inflation spiral. Thus, the Fed is currently attempting to convince the market, consumers and the business community that it is serious and willing to do what is necessary to bring inflation down to its desired 2% range, but what is unsaid is that they hope that they do not have to actually do whatever is necessary and that inflation will moderate on its own.

david halte

2 years ago

The Fed’s trivial rate hike in March pushed enough liquidity into the market that prices were kept above March option close. The price action reflected it wasn’t a proper squeeze, but enough for shorts to go unfilled. Busted shorts slow a market decline, so the Fed’s put is unnecessary.

The Fed’s jawboning of accelerated rate hikes erupted within weeks before April options. The FOMC meets the following week, where they will know if shorts remain in fashion. If so, a minor rate increase will again pump the markets, for another month of wedgies. At the expense of rising inflation.

Casual_Observer2020

2 years ago

Would be interesting to see what the Japanese yield curve did over the last 20+ years as a comparison. With all kinds of manipulation I am guessing the yield curve, like other economic stats, doesn’t mean as much.

MPO45

2 years ago

Not too long ago, there was a narrative here that workers left the labor force because they were getting free money from the government. The narrative was that once the free money ended, all would return to normal.

The Wall Street Journal had an excellent story about how millions of workers don’t plan on returning to work, they are permanently gone.

link to wsj.com

I don’t know if we will have a recession or not but one thing I can guarantee is wage inflation will continue to climb as there simply wont be enough workers. Not enough tech people, pilots, lawyers, doctors, and minimum wage grunts to do all the work that 330 million people expect here in the USA.

Don’t forget 60 million boomers will be over the age of 65+ by 2030, that too will do wonders for the American economy. Continued demand for goods and services with a labor depletion of 60 million.

If you are a small business owner, you should start planning for $30+/hr labor and increasing aggressively over the next 8 years. Business models will HAVE to change. Alternatively, find a less labor intensive business because those will be the ones that thrive.

On a side note, I just paid $50 for a large pizza. There were so many fees (delivery, service, gas, tip) and the pie itself was $30. That’s the new reality.

Eighthman

2 years ago

Reply to MPO45

Prepare for possibly the greatest humiliation in US history. They start a full on economic war with China and then can’t build the supply chains here for lack of workers. Armchair generals can’t get their meds, among other things. If the US is dominated by political “mobs” – instead of realpolitik – I see this easily happening.

prumbly

2 years ago

Reply to MPO45

Why would you pay $50 for a large pizza? No way would I do that. I would rather eat my own leg.

MPO45

2 years ago

Reply to prumbly

Quality and fresh ingredients cost money these days. I don’t eat “chain” pizza. I rarely eat pizza anyway so it was a bit of a treat.

LPCONGAS99

2 years ago

Reply to MPO45

$18 from my local non chain place. I drove there

jhrodd

2 years ago

Reply to prumbly

We make our own pizza, it’s the best in Town and I doubt it cost $5. We also make our own pasta, ravioli, etc.

MPO45

2 years ago

Reply to jhrodd

Cost $5? I assume that you value your labor at ZERO dollars. Do you build your own cars? Make your own pots and pans? Build your own bridges? Make your own clothes? Why only spend time making pizza when you can spend all your time making stuff for yourself?

Casual_Observer2020

2 years ago

Reply to MPO45

You are comparing food to non food. Let’s say he has everything he needs but food. Life is pretty cheap for him and inflation doesn’t affect him as much as we would like to think. I think a lot of people that have left the workforce have done this.

MPO45

2 years ago

Reply to Casual_Observer2020

I am crystalizing that the most valuable thing we all have is TIME not money. The person that makes a $5 pizza is omitting countless things:

1. Sourcing of ingredients – Drive to store or grow your own or have Amazon deliver. This takes time.

2. Combining the ingredients to produce something to be cooked – this takes time.

3. Cooking the pizza – this takes time.

I picked up the phone and pizza showed up at my door. Total cost $50. Now what was the true cost of the $5 pizza? And if inflation doesn’t affect him then it shouldn’t be any problem now should it as long as he has TIME to do all that “cheap” stuff.

kiers

2 years ago

Reply to jhrodd

do you make your own water?

Lisa_Hooker

2 years ago

Reply to kiers

Interestingly, I do mine my own water.

Zardoz

2 years ago

Reply to prumbly

For some of us, that’s 20 minutes pay. It’s all relatiive.

FromBrussels

2 years ago

Reply to Zardoz

Yeah sure keep a low profile, moron !….or is it REALIST ? it s the same anyway …

Christoball

2 years ago

Reply to MPO45

Why do you demean minimum wage people as grunts? I guess they are more valuable than you think.

MPO45

2 years ago

Reply to Christoball

Have you ever opened something called a dictionary? link to merriam-webster.com

Grunt

Definition 4

a: a U.S. army or marine foot soldier especially in the Vietnam War

b: one who does routine unglamorous work —often used attributively

Why do YOU demean minimum wage people?

Christoball

2 years ago

Reply to MPO45

I apologize. I did not know you were paying minimum wage people a compliment; and comparing them to our highly trained, brave military personnel. The people who do most of the real work in our economy are amazing. I respect them immensely.

RonJ

2 years ago

Reply to MPO45

“The Wall Street Journal had an excellent story about how millions of
workers don’t plan on returning to work, they are permanently gone.”

Leo Terrel was recently discussing on his radio show, that some 40% of students in the L.A. school system, had not returned to classroom learning.

Zardoz

2 years ago

Reply to MPO45

When working won’t earn you a living anymore, and by bother?

FromBrussels

2 years ago

Reply to Zardoz

NOW I realize you are fckn REALIST ……HEY Mish, he s fn back !

Casual_Observer2020

2 years ago

Reply to MPO45

I don’t think any of what we are seeing is sustainable. In fact, the higher inflation goes, the worse the chance of epic deflationary collapse. I think it all collapses once the credit cycle for companies collapses. This is why it only takes a couple of bad quarters before companies start cutting employees and looking at failing business units. We need a really bad recession to clean out the system. We haven’t gotten it since 2009.

Lisa_Hooker

2 years ago

Reply to Casual_Observer2020

What clean out was there in 2009? The big banks? The big corporations? The big insurance companies? The US Federal Reserve?

Six000mileyear

2 years ago

Regardless of what the FED did, yields on the 10 year US bond are higher than pre-COVID and doubled in 4 months. Things could be worse for consumers had the US dollar not strengthened as well.

Maximus_Minimus

2 years ago

Having a buch of loonies in charge of monetary policy results in wild guessing about the yield curve? Who would have thought.

Does it even matter since what does the yield curve mean in dysfunctional manipulated economy?

shamrock

2 years ago

Aggressive QT means steeper yield curves, non-aggressive QT also means steeper yield curves. Am I reading this right?

StukiMoi

2 years ago

Reply to shamrock

“Aggressive QT means steeper yield curves, non-aggressive QT also means steeper yield curves. Am I reading this right?”

Depends on how the headline, short, rate moves. (as well as a host of other things….)

Naively, the more aggressive QT, the higher long rates (10, 30) get. (QT means selling longer durations, driving down their prices, driving up long yields.)

Headline rate hikes, otoh, drive up short rates.

Yield curve “steepness,” is just the difference between the two. Hence depends on both.

Of course, the two don’t move even remotely independently. The Fed effectively sets, or at a minimum HEAVILY influences, both (within limits. In Zimbabwe those limits were finally exceeded…. But Zimbabweans aren’t known for being quite as gullible and well indoctrinated as the Americans The Fed has succeeded in transferring all US wealth to, so the limits are no doubt higher here.)

Hence whenever The Fed tightens one end, increasing rates there: People start expecting tightening other parts as well. So they buy and sell accordingly, effectively frontrunning The Fed. Resulting in that actual changes in “steepness”, can appear rather disconnected from actual, this-instant, official Fed policy.

Similarly, once people notice that The Fed may be getting concerned about some high profile leech possibly risking losing a penny of stolen loot, hence is expected to ease off on tightening: They will expect this easing at both ends. People will hence, again, buy and sell such that the net effect on “steepness” becomes unpredictable.

It’s a bit like a sinking boat: It’s taking on water, so you know it’s sinking. But if the bow starts sinking the fastest (short end), people on board all run/crawl to the stern (long end), making that heavier, hence causing that to then sink faster. Rendering the exact bow-stern list as the boat finally sinks, unpredictable.

Yield Curve Inversions Vanish in Violent April Steepening, What’s Going On?

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