The 2-10 year spread moved below the 0.0% into negative territory back in July and it has been pretty much down since then. The spread is currently at -0.706 which is supposed to be a prelude to a recession. If the Fed overstays it’s welcome on the tightening side – it seems like they want to raise rates but keep them high into 2024, – that would do the trick. Wouldn’t it? I would think so.
Yet, if you look at the S&P index, it is up close to 1.3% today. On Friday it rose 1.89%. The price moved above its 200 day MA at 3966.35 on Friday (just barely) tilting the longer term bias to the upside, and extended that bullishness to a high today of 4039.
That his 15.20% above the low from October 2021, and the decline from the all time high is only -16.71%..
If the yield spread is so negative, shouldn’t the stocks be on their back anticipating lower earnings going forward?
That is something the market will have to figure out over time.
One help to the stocks move higher came during Fed’s Waller speech on Friday when he said if the inflation does come down like the market expects, he would be willing to shift policy. That is different then most who are set in their ways as far as policy with the storyline centered on tightening to 5.00 to 5.25% and keeping rates there well into 2024.
The Waller comments sent the stocks higher and the 2-10 year yield spread went from -0.75 basis points to -0.67 basis points. However, that spread is back to -0.706 basis points, but the stocks have continued their run.
So are the stocks getting ahead of themselves, or is the 2-10 year spread going to correct itself over time? That is will the Fed, do as Waller said and that forces down the 2s and maybe increases the 10s a little?
Its probably still too early to tell, but for me, pay attention to the technicals. If the stocks want to stay above the 200 day MA in the S&P, that’s bullish.
For the 2-10 year spread, getting to -0.48 (from -708) would still be negative but it would be a step in the steepening direction and a concession by the market that a big recession is perhaps not going to happen.
We will see.