Forex News March 21, 2022
Yield Curve
- Since 2020, the yield curve has remained flat. Is the narrowing spread a sign of the coming US recession? Is the Fed still lagging behind?
- The US 2 vs 10 year spread ended the week near 21 basis points, near the lowest levels since the pandemic began in March 2020. During the pandemic, the spread fell to an all-time low of 8 basis points.
- The spread in 2022 reached a high of around 90 pips on January 10, but has since dipped. The rise in inflation, combined with the Fed’s reluctance to address it, gave traders the impression that the Fed was falling behind the curve.
- Finally, the Fed would have to act, and it would have to act quickly, choking off the economy in the process.
- The Russian/Ukraine war is certainly not helping, as inflation from the supply shock is now being pushed up by inflation from the war and its impact on commodities such as wheat and corn, as well as nickel and oil.
- When the market expected the Fed to “up” its tightening bias to 4-5 times in 2022 last Wednesday, they went straight to 7 hikes in 2022. They now expect the rate to be 1.90 percent by the end of the year. Powell was, in fact, more Volker-like.
- There is no doubt that recent history has bolstered people’s investment portfolios, and the scarcity of housing has sent prices skyrocketing as well. With investment accounts and home prices making consumers feel wealthy, it is believed that the economy has enough momentum to keep going.
- Furthermore, it was thought that if the Fed could get through the rough patch and inflation DOES begin to move lower as the supply shock unclogs further and the Russian Ukraine war fizzles out, then happy days would return with rates more normalised and the balance sheet reduced.
- The 2-10 year spread continued its downward trend, closing near its lowest level since March 2020. According to the bond market, the economy’s future may not be so bright.
- This week, traders will be keeping an eye on the 2-10 year spread. If it continues to weaken, expect the stock market to lose its zeal as not only fears of slower growth emerge, but earnings estimates begin to fall as inflationary pressures squeeze earnings.
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