Market Pulse

Market Pulse

April 4, 2022

In focus

Last week, 2-year U.S. Treasury yields rose above 10-year yields, marking the first curve inversion since 2019 and the deepest inversion since 2007. Throughout the past half-century, the 2/10-year yield curve has provided a reliable leading indicator of recessions, usually within the next one to two years. Its strong track record is forcing market participants to take note. The current 2/10-year inversion has been fueled by the combination of 1) strong upward pressure on shorter-dated yields in anticipation of Federal Reserve (Fed) rate hikes; and 2) relative stability in intermediate and longer yields as participants question U.S. growth prospects under more restrictive monetary policy and in the face of rising geopolitical uncertainty.

As noted in our latest Market Perspective, the yield curve inversion should not be dismissed. It suggests the Fed faces a high degree of difficulty to rein in inflation without hampering the ongoing expansion. However, the Fed’s policy shifts under discussion –namely, rate hikes and balance sheet reductions –will take time to implement. The ultimate impact of the Fed’s tightening will likely take years to fully emerge. As it stands today, the Fed remains in a very accommodative stance and many other economic indicators, such as the unemployment rate, weekly jobless claims, Leading Economic Index, and manufacturing activity, suggest favorable economic conditions in the very near term. It is also worth noting that from a historical perspective, the S&P 500 has averaged an 11% return on a 12-month basis following the last seven curve inversions. Still, the U.S. yield curve’s signals are key considerations, particularly with respect to what they say about medium-term growth outlooks. While the 2/10-year yield curve is just one economic indicator among many, it’s an important one.

A look back

  • Global equity markets traded modestly higher last week by 1.19%. U.S. markets once again led the way with strength also seen in Japan. Small caps struggled along with European and Asian markets, though sentiment in emerging markets improved.

  • The U.S. yield curve flattened by 0.15% last week following hawkish comments from Fed Chair Powell where he put a 0.50% hike on the table for the upcoming Fed meeting triggering a bond sell-off.

  • The situation remains fluid in Ukraine with in-person talks to resume this week between negotiators. Odds are growing that neither side will be able to claim full victory.

A look ahead

  • On Wednesday, market participants will study the latest FOMC Meeting Minutes from the March rate decision, seeking clarity over the Fed’s willingness to raise rates by more than 25 basis points (0.25%) at the May 4 meeting.

  • Russia and Ukraine will resume peace talks virtually this week.

  • Economic releases: FOMC Meeting Minutes, Durable Goods Orders, Factory Orders, MBA Mortgage Applications, Initial Jobless Claims, Wholesale Inventories, ISM Services Index.

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