This is a data filled with many believing the statistics will be absent the noise of government shutdown. Many are surprised at the quickly steepening yield curve between the two-year and thirty-year Treasury, a steepness that was last experienced over four years ago when the term transitory was imbedded in the lexicon as the Federal Reserve was vowing to maintain the overnight rate at 0.0% until mid-2023.
The yield curve began to steepen in earnest around the time of the shutdown, the Supreme Court hearings on the tariffs, stepped up pressure from the Administration to lower short term interest rates, announced plans of the largest companies planning to spend between 25% and 50% of revenues on AI—funded via debt, and the unending demand of monies by the government where fiscal recklessness is the in thing to continue.
Inflation is stuck in a tight range, and many believe it is reckless for the FOMC to lower rates in today’s environment, questioning what is the neutral rate or the interest rate that neither adds to growth nor detracts from growth.
At the conclusion of December’s FOMC meeting, the range amongst its members of the neutral rate was historical…between 2.6% and 3.9%. Longer dated Treasuries are partially priced off of the neutral rate which was previously regarded as around 2.0%.
The economic calendar is comprised of many top tier indicators such as the ISM and the ISM Services Surveys, the JOLTS Job Openings statistics, factory and durable goods orders, inventory levels, NY Fed 1-year inflation expectations, a sentiment survey and the BLS Employment report.
How will the statistics influence expectations? Historically the spread between the two-year and thirty-year Treasury is around 225-250 bps according to the St. Louis Fed, but the range is considerable. Thirty years ago, it was around 1000 bps. About two years ago the spread was about -195 bps. A question at hand is will the spread exceed the average on the upside as it did on the downside?
Mortgage back securities are believed to be priced correctly in today’s environment.
Friday’s markets were relatively quiet with the yield curve further steepening.
Last night the foreign markets were up. London was up 0.23%, Paris up 0.12% and Frankfurt up 0.60%. China was up 1.38%, Japan up 2.97% and Hang Seng up 0.03%.
Futures are bifurcated as Dow futures are flat and NASDAQ is up 0.5%. What will be the impact of Maduro’s capture? Oils tocks ae are jumping in premarket trading. The 10-year is up 5/32 to yield 4.17%.
