April 4, 2022
Good morning,
After a bit of a “push” last week for the major equity market indexes – the S&P 500, NASDAQ and Russell 2000 were up +.08%, +.66% and +.68% respectively for the week – our investment posture remains the same. We’re giving the recent 3wk old rally the benefit of the doubt despite last Thursday’s month/quarter end ugliness, because when the rally began, it did generate some very reliable, though not infallible, short-term buy signals. Now we’re waiting on egg-shells to see if there is enough market follow-through to trigger intermediate and longer term signals of confirmation. Push weeks like last week don’t help.
The new week kicks off with markets of all kinds (stocks, bonds, commodities & currencies) embracing a familiar theme just as future Fed rate predictions reflect a peak around the middle of next year (2023). The highlight this week should be the release of the minutes of the last Fed meeting. The point is, all attention is on the pace of rate hikes.
The US 10yr Treasury yield is just off last week’s reaction high of 2.54% at 2.40% this morning. The real news however is that the U.S. 2yr Treasury is yielding 2.43% this morning – that is more than the 10yr yield and is the very definition of a 2’s-to-10’s yield curve inversion. And yield curve inversions are decent, though imperfect, early indicators of recessions. It’s reasonable to ask why this isn’t having a more significant impact on equity prices, among other assets.One possible reason is that the pricing of the real Fed funds rate (-2.46% today) is still well below February’s peak (-2.00%). Another possible reason is the market’s apparent view that rates will move sharply lower soon after the tightening cycle is finished. And yet another possible explanation is that the Fed has not yet turned hostile and at this point has only raised rates .375%. None of these reasons are mutually exclusive.
Be well,
Mike
Sources; Addepar, Bloomberg