by Bryan Perry
July 11, 2023
A funny thing happened this past week that got little mention by the financial media, whereas I thought it was particularly important, and a bullish development. The spread on the 2/10 Treasury narrowed from retesting the historically wide spread of 110.9 set back in March. At the beginning of the holiday-shortened week, the spread was around 109.6 on Monday. By Friday’s bond market close, the spread had tightened to 0.88, a stunning move that should brighten the economic outlook if the trend continues.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
The recent 110-point-gap had the recession bears convinced of a recession, since the last time it was that large, it preceeded the recession in the early 1980s, triggered by extreme inflation that had to be corralled with surging interest rates. The 1980 “Volcker Shock” raised the fed funds rate to its highest point in history, ending double-digit inflation. That was an extreme time for those of us that remember well how it impacted our lives. Thankfully, the inflation dragon looks like it will be tamed much earlier this time around, but it will likely remain embedded in the cost of shelter, labor, and services for years to come.
Two years ago, the 2/10 spread was at zero. And prior to July 2021, the yield curve was in a fairly normal 1.0%-1.5% range. If the bond market starts to raise its confidence that the economy can skirt a recession, with GDP staying above 2%, then there is a case for bringing yields back into much closer alignment.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
“The Golden Path”
Considering the angst and hand-wringing that has been stressed by the most ardent recession bears, I’m surprised this sudden move went somewhat unnoticed. Maybe some of the relief came from new Chicago Fed President Austan Goolsbee, when he commented last Friday in a CNBC interview that he does not disagree with his fellow U.S. central bankers that rates need to rise a couple more times this year to beat back too-high inflation, saying, “That is on the golden path” of bringing inflation down to 2% without a recession. That would be “a Fed triumph and that can involve a couple of rate increases over this year.”
In a headline-driven market, that statement struck a chord with bond traders and, although Goolsbee is a card-carrying cheerleader for the Biden administration, the market welcomes any Fed-speak that talks down recession. In the 2020 general election, Goolsbee co-chaired the Economic Advisory Council for the Joe Biden campaign, and it would seem that Mr. Goolsbee might have his own “golden path” laid out to become Fed Chairman when Jerome Powell retires from the position – especially if Biden is re-elected.
Whatever the case, despite the market enduring a week of pre-earnings season consolidation where 10 of 11 sectors closed in the red, it is my view that the big bump in the 2/10 spread late Thursday and Friday is significant for the bullish trend it provides for stocks as a catalyst right before Q2 reporting season. Last week’s market price action of backing and filling was, in my view, constructive for the rally to continue.
Real estate was the only rising sector last week, but it looks like a good set-up for the broad market.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
The market could be at a crossroads. Consider: (1) The yield curve is moving in the right direction, (2) the appetite for risk is on the rise, (3) gold prices are lower as investors opt for higher yields to fight inflation, (4) commodity prices are holding steady, with (5) a much-improved global supply chain contributing to predictably lower inflation ahead, as (6) the dollar is easing lower, and (7) earnings season now begins.
It remains too early to make any sort of macro call, but in addition to the kick of earnings season, investors will receive key inflation data from the CPI and PPI this week, plus Friday’s University of Michigan Consumer Sentiment Index. Some good news on the inflation and earnings fronts will likely lead to a further flattening of the curve – and it would be great to go through a week not being reminded of the ugly inverted yield curve that results in a hard economic landing! I believe a rate hike in late July looks fully priced in, but not one in September.
It’s a very fluid situation, but the economic glass is starting to look more half full than half empty.
All content above represents the opinion of Bryan Perry of Navellier & Associates, Inc.
Also In This Issue
A Look Ahead by Louis Navellier
The Fed Governors Are Waging a War of Words… Again
Income Mail by Bryan Perry
The Yield Curve Suddenly Tightens – a Bullish Development
Growth Mail by Gary Alexander
July 4th Is a New Thanksgiving Day – With Two Bullish Surprises
Global Mail by Ivan Martchev
The Short Covering Rally is About to Stall
Sector Spotlight by Jason Bodner
The War Between Market “Noise” and Vital Data
View Full Archive
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Bryan Perry
SENIOR DIRECTOR
Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.
Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license. All content of “Income Mail” represents the opinion of Bryan Perry
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