Yield curve inversion dominates the discussion

Here's a look at the yield spread between US 2-year notes and 10-year notes. It's sitting at 1 basis point right now and went negative on some screens briefly. It's the first inversion since 2019.

There are many eyes on this chart because it has a long track record of inverting 6-12 months ahead of a recession. Yesterday, I wrote about how the Fed doesn't believe an inversion signals anything and instead watches the spread between 3-month bills and 18-month forward bills.

That said, I think there's some soft  yield-curve  Yield Curve A yield curve is a line used to help determine interest rates of interest rates for a specific bond, differentiated by contract lengths. This is useful for contrasting maturity dates, for example 1 month, 1 year, etc.In particular, yield curves help underscore the relationship between interest rates or borrowing costs and the time to maturity.Some of the best examples of this include US Treasury Securities, which are among some of the most observed worldwide by traders. By determining the slope of yield curves, it is possible to plot or predict future interest rate changes. There are three types of yield curves that are primarily studied, classified as normal, inverted, or flat.Why are Yield Curves Important?Yield curves like other benchmarks help investors and analysts ascertain more information about specific constructs affecting financial markets.For example, a normal or upward sloping curve points to economic expansion. Expectations of yields becoming higher in the future help attract funds in shorter-term securities with the hopes of purchasing longer-term bonds later, for a higher yield.The opposite is true in the case of an inverted or downward sloping curve, which traditionally points to an economic recession. If yields are expected to eventually be lower, investors opt to purchase longer-term bonds to help price in yields before further decreases occur.Subsequently, these are predictive of economic output and growth and are thus instrumental in financial analysis.These curves are also utilized primarily as a barometer for other forms of debt in a market, including bank lending rates, mortgage rates, and other benchmarks.The most reported yield curves deal with US Treasury debt, comparing the 3-month, 2-year, 5-year, 10-year and 30-year intervals. This information is published daily. A yield curve is a line used to help determine interest rates of interest rates for a specific bond, differentiated by contract lengths. This is useful for contrasting maturity dates, for example 1 month, 1 year, etc.In particular, yield curves help underscore the relationship between interest rates or borrowing costs and the time to maturity.Some of the best examples of this include US Treasury Securities, which are among some of the most observed worldwide by traders. By determining the slope of yield curves, it is possible to plot or predict future interest rate changes. There are three types of yield curves that are primarily studied, classified as normal, inverted, or flat.Why are Yield Curves Important?Yield curves like other benchmarks help investors and analysts ascertain more information about specific constructs affecting financial markets.For example, a normal or upward sloping curve points to economic expansion. Expectations of yields becoming higher in the future help attract funds in shorter-term securities with the hopes of purchasing longer-term bonds later, for a higher yield.The opposite is true in the case of an inverted or downward sloping curve, which traditionally points to an economic recession. If yields are expected to eventually be lower, investors opt to purchase longer-term bonds to help price in yields before further decreases occur.Subsequently, these are predictive of economic output and growth and are thus instrumental in financial analysis.These curves are also utilized primarily as a barometer for other forms of debt in a market, including bank lending rates, mortgage rates, and other benchmarks.The most reported yield curves deal with US Treasury debt, comparing the 3-month, 2-year, 5-year, 10-year and 30-year intervals. This information is published daily. Read this Term control coming where the Fed will sell off long-dated bonds and re-invest at the front end of the curve in order to speed up the balance sheet runoff. That will put some steepness back in 2s10s.

Overall, I don't think there's any magic indicator of recessions. The 2019 inversion wasn't some voodoo predicting a pandemic. There is certainly a slowdown coming after a blockbuster year of growth but governments won't tolerate a recession in this era; they will instead ramp back up spending.

Here are thoughts from BMO:

What happens once 2s/10s crosses the zero threshold? History shows there is no immediate ramification for an inverted curve and the recession-predicting character of 2s/10s sub-zero has long been unclear.
...
Given the relevance of oil and gasoline to headline CPI and therefore breakevens, the modest retracement may simply be a respite as opposed to any renewed faith in the Fed’s ability to effectively offset higher headline consumer prices as this moment. The lagged
impact of monetary policy actions notwithstanding, the second quarter will be very telling in terms of the trajectory of year-over-year inflation prints. The April-June base effects remain relevant even as the runup in food and energy prices thus far in 2022 complicate the issue. In the event core prices begin to slowly retrace from the recent spike, the divergence between headline and core prices will be notable; although we don’t anticipate it will derail the Fed’s initial efforts to normalize policy rates. Let us not forget that one of the underlying motivations behind a hurried pace of rate hikes is to ensure the Committee has sufficient flexibly to address another recession – regardless of whether it’s one curve inversion portends.

And from our friend Chris Weston:

Inversion 2s10s… it’s all doom or is it? The average return in the S&P in last 13 inverted 2/10 curve is 3.7% over next 60 days and 12% over next year.

Trading a recession is hard. If  inflation  Inflation Inflation is defined as a quantitative measure of the rate in which the average price level of goods and services in an economy or country increases over a period of time. It is the rise in the general level of prices where a given currency effectively buys less than it did in prior periods.In terms of assessing the strength or currencies, and by extension foreign exchange, inflation or measures of it are extremely influential. Inflation stems from the overall creation of money. This money is measured by the level of the total money supply of a specific currency, for example the US dollar, which is constantly increasing. However, an increase in the money supply does not necessarily mean that there is inflation. What leads to inflation is a faster increase in the money supply in relation to the wealth produced (measured with GDP). As such, this generates pressure of demand on a supply that does not increase at the same rate. The consumer price index then increases, generating inflation.How Does Inflation Affect Forex?The level of inflation has a direct impact on the exchange rate between two currencies on several levels.This includes purchasing power parity, which attempts to compare different purchasing powers of each country according to the general price level. In doing so, this makes it possible to determine the country with the most expensive cost of living.The currency with the higher inflation rate consequently loses value and depreciates, while the currency with the lower inflation rate appreciates on the forex market.Interest rates are also impacted. Inflation rates that are too high push interest rates up, which has the effect of depreciating the currency on foreign exchange. Conversely, inflation that is too low (or deflation) pushes interest rates down, which has the effect of appreciating the currency on the forex market. Inflation is defined as a quantitative measure of the rate in which the average price level of goods and services in an economy or country increases over a period of time. It is the rise in the general level of prices where a given currency effectively buys less than it did in prior periods.In terms of assessing the strength or currencies, and by extension foreign exchange, inflation or measures of it are extremely influential. Inflation stems from the overall creation of money. This money is measured by the level of the total money supply of a specific currency, for example the US dollar, which is constantly increasing. However, an increase in the money supply does not necessarily mean that there is inflation. What leads to inflation is a faster increase in the money supply in relation to the wealth produced (measured with GDP). As such, this generates pressure of demand on a supply that does not increase at the same rate. The consumer price index then increases, generating inflation.How Does Inflation Affect Forex?The level of inflation has a direct impact on the exchange rate between two currencies on several levels.This includes purchasing power parity, which attempts to compare different purchasing powers of each country according to the general price level. In doing so, this makes it possible to determine the country with the most expensive cost of living.The currency with the higher inflation rate consequently loses value and depreciates, while the currency with the lower inflation rate appreciates on the forex market.Interest rates are also impacted. Inflation rates that are too high push interest rates up, which has the effect of depreciating the currency on foreign exchange. Conversely, inflation that is too low (or deflation) pushes interest rates down, which has the effect of appreciating the currency on the forex market. Read this Term comes back down, so will the front end.