Market fears the Fed will over tighten

Always needing an excuse for any given daily move, the MSfM serves up investors’ Fed tightening fears this morning

You can click the image of a pensive trader staring intently at his flashing green and red numbers and charts to read whatever the article has to say.

Dow falls on fears the Fed will over tighten

As it happens, the fear of Fed over tightening is traditionally a valid one as the 2 year Treasury bond yield diverged the proxy for Fed policy (T-bill yields) into the last two cyclical bear markets in stocks. Today, the same thing is happening. However, as noted often in NFTRH and a couple times previously here, the 2022 cyclical bear market got a big head start this time. That means one of two things, in my opinion.

  1. After the relief rally peters out it’s back to bearish business and angst ridden casino patrons ain’t seen nuthin’ yet, or…
  2. The stock market handily discounted the coming bond market divergence and happy days are here again!

Don’t get caught guessing wrong on this. I have my favored view and you may have yours. Or maybe you don’t look at indicators like these and just prefer nominal charts. Or maybe you don’t look at charts and prefer fundamental economic analysis. In my view, an integrated and comprehensive approach will be needed to navigate this situation.

2 year US Treasury bond yield

One thing we know for sure is that analogs to the past are not reliable. This chart proves it. So the next time you see a man staring at a chart analog (devoid of other analysis and perspective) attempting rile your emotions with it, you might think about 2022 and all the distortions it put into this and so many other indicators.

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This Post Has 2 Comments

  1. MikeC

    Is it a fair comment to say that as the shorter maturity yields start to drop, that longer term yields (specifically 10+ years) are most likely to stay flat or possibly drop as well? Any possible roadmap to where the long end goes higher than where it currently is?

    1. Gary

      Yes, if inflation renews and ramps they’ll all probably go higher. If the deflationary view holds sway then they’ll drop, with the short end dropping harder (as casino patrons flock to liquidity) and the yield curve steepens.

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