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Powell’s Punch
In what was supposed to be a ‘vanilla’ testimony to Congress – Jay Powell turned this into a market moving event. Not pleased with how market participants interpreted his previous address – he set the record straight that rates will be higher for longer. His testimony left no room for ambiguity – it was full hawk. Markets quickly revised their forecasts for the peak Fed funds rate – with some now thinking 6.00%. What’s more, the 2/10 yield curve is now negative 107 basis points. We have not seen that since 1981. Soft landing? Good luck.
What Do Credit Spreads Tell Us?
There are two types of economic indicators which are often cited in the financial media: (i) those which lag; and (ii) those which are leading. The latter of more useful. One of the best real-time leading indicators are credit spreads. These are excellent indicator of the ‘health’ of the financial system. So what do they tell us today with interest rates sharply higher?
Soft Landing Hopes
Markets have been largely range trading for 17 consecutive weeks. For example, the S&P 500 appears caught between 3800 and 4200. And I think it’s easy to explain: there are valid cases for both the bullish and bearish case. Equally however, there is also no compelling argument to suggest markets are set to explode higher or crash. This market requires patience. What’s more, you cannot afford to be too aggressive betting on either outcome.
10-Year Yields Continue to Rise… Why this Matters
The bond market has connected the dots – rates are likely to stay higher for a lot longer. This has seen yields all along the curve surge… with the 10-year now back above 4.0%. The 2-year has moved 100 bps in just 4 weeks. This has implications for stocks and their valuations… none of it great. Look for the 10-year to push higher – perhaps to 4.4% – which represents opportunity for investors.