Yesterday afternoon big risk rally was a pleasant break. The market came into Powell’s press conference oversold, looking for a reason to go higher. Powell’s somewhat dovish comments just enough to perk up oversold conditions and weak sentiment and off to the races we went. But inflation is still high and until the market starts to believe that the Fed has an adequate handle on inflation overall market volatility will continue to persist. We’re getting a taste of that this morning……..…onward.
A steep yield curve is a good thing for risk assets and the yield curve steepened yesterday. Market practitioners always quote 10y v 2y UST when assessing yield curve shape but the Fed actually looks at 10y vs. fed funds rate. I have a copy of the 2018 San Francisco Federal Reserve academic white paper on why 10y vs. Fed funds is a better measure to follow, in case anyone wants to read it or is having trouble sleeping.
Lending rate > deposit rate = steep = good. A steeper curve incents lending. Lending fuels investment in both people and plant and that drives the economy. The economy drives earnings. Earnings drives the direction of the stock market. The shape of the yield curve is a super important thing to follow when thinking about recessionary risks. A steep curve is good and that’s what we have today.
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