The bond market signal remains key for the outlook going into year-end
Besides rising breakevens and yields in general, the flattening of the yield curve over the past week or so especially is sending a very big signal that a policy accident by central banks is looming just around the corner.
But as Adam pointed out last week here, which one exactly matters a lot and we'll only get better clarity of that in the aftermath of this week following a host of key central bank meetings featuring the RBA, Fed, and BOE.
The more straightforward argument is that the Fed and other major central banks are starting to fall behind the curve in tightening policy to deal with inflation, especially if their reaction is delayed and needing to be over-aggressive just to catch up.
The fear is that such volatility and supposed "unnecessariness" will burst the economic recovery bubble and send shockwaves across the financial system.
But my thinking is more leaning towards this as I mentioned last week:
I would say this says a lot about the market view on the economy, that being even if central banks are to hike rates in the short-term, it may snuff out real inflation and at the same time stifle the economy in the macro picture.Sure, the rate hikes that will come can be reversed, but that just signifies that central banks are floundering all over the place just to keep the economy afloat and not really being able to do much to spur more robust growth conditions.
In other words, at the end of the day, central banks may just end up condemning themselves into the secular trend seen in the bond market since the 80's.
In any case, central banks are going to arguably be more aggressive this week in pushing back against tightening too quickly - especially the RBA and Fed.
But if the yield curve continues to flatten, expect that to produce more jitters and potentially weigh more heavily on risk trades going into year-end.