Ever since Jumpin' Jerome Powell, Chair of the US Federal Reserve, made his comments depicting his hawkish stance, the carnage in the US equities markets is brutal. Friday was an greater than 1,000 point drop with Monday seeing a red day.
So much for the bounce after the weekend.
It is undeniable that Powell's stance is horrific for stocks. Powell made it known, like he did before, the Fed is committed to crushing inflation. Of course, this is the same Fed Chair who openly stated that it was due to supply constraints and the only thing it could do is to crush demand.
i.e. KILL THE ECONOMY.
This is what the stock market is reading.
Yet, we still have the bond market telling us a much different story.
The bond market is much larger than the equities market. It is also a different type of environment. With bonds, an investor knows what his or her return will be the second the asset is purchased. This is clear from the start.
Hence, we see the fixed income market with an alternate viewpoint. It is not about the speculation as much as the ongoing state of economic affairs. This is what bonds price in, especially the long end of the yield curve.
So what is this telling us?
Here is the latest from CNBC:
With the yield curve, there is an art to it. The key is to not only look at the shape, but also the moves that are being made in relation to the other pricing points. This is especially true for the long end (right side).
So we have a curve that is higher than it was 30 days ago. This is no surprise since the Fed has only stopped short of taking out a neon sign on the Vegas Strip announcing interest rate hikes in September. Thus, we can see the market front-running the Fed.
That is the obvious part. What is really telling is how the 10Y/30Y has changed. We see the relationship between the two flattening. This is heading towards a possible 10Y/30Y inversion. That is a major recession signal.
Of course, we already have that with the 10Y below everything with from the 2Y through the 7Y. Money is suppose to be more expensive locked up over time, not less. This is a major red flag.
We are told the economy is strong. This is uttered by everyone from the White House to Warren Buffett to the Fed. Yet we are also bombarded with messages the Fed is going to do all it can to tame "inflation".
Ironic they have the solution to a problem they didn't cause.
Naturally, they are trying to convince everyone that we will have a soft landing. When have they pulled that off? Throughout history, it is very rare. More than 90% of the time, things ends with a faceplant into the pavement.
The reality is the economy is not doing well. Since the lockdowns, things have rather sucked. While everyone looked at goods being sold (and the shortage) few mentioned how services still are not back to their pre-COVID levels. How can the economy be strong when services are lagging not two years after the lockdowns ended?
The answer is the economy is not strong.
Also, when we look at the increase in prices, that factors into the macro numbers people point to. For example, did anyone take the time to look at sales based upon volume? If they did, it is quickly realized the global growth that was being touted was not there. Sure, China's imports looked great since they were up over 100% in 2022. Of course, commodity prices went through the roof. By volume, China's imports were actually down.
The same is true for Germany. Germans paid 9% more to get 3% less goods. Does that sound like a storming economy?
To Powell, it seems like it does.
Either way, the bond market is not spooked by Powell. It is very consistent what it is telling us.
Things are in rough shape. Do not buy into the rhetoric.
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