(367 words, ~4min read)
Looking at nominal yields today, remember interest rates are the lubricant of the financial system. We’ve become accustomed to low rates over the past decade and today an inflexion point approaches and we might get a better signal on the economy’s direction.
Big Triangle Formation
This chart of the US 10yr treasury bond is making the rounds this week. The point is that an inflexion point, or establishment of a trend is likely in the near future, or at least by the end of February. Markets are forward looking, so if yields move lower it’s perceived as good news for risk assets. Risk assets tend to rally when yields fall. Rising yields have the opposite effect.
Hopefully a resolution of the technical triangle setup will help determine the direction of the economy. For now, we’re stuck between either a soft landing or a mini recession. Odds are split between the two. I think if higher yields prevail it will be short lived and the much awaited recession finally hits the economy, this hypothesis assuming the labor market rolls over.
In other words, more data is needed.
Final Thoughts
The bottom line is until the labor market weakens we’re stuck between two battling narratives: 1) soft landing and 2) a mini recession. Nominal bond yields can help our forecast. I look at it this way, if a consumer has a job they can scrape through to the other side of the inflation chasm, but if they loose their job it’s a disaster for the economy.
The economy is hostage to the employment rate, a lagging indicator. This is a first.
In view of the current data , no changes to the asset allocation of our flagship ETF portfolio. Staying defensive for now.
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