As stated for months/years now, the macro has swung big picture inflationary by the signaling in long-term bond yields. However, functionally we also have to deal with shorter-term, interim signals. So let’s take a review of nominal yields and the 10/2yr yield curve.
This daily chart shows the yield curve and the two nominal yields that inform it. The first thing is to note that it appears that the “steepener” is holding after an extended consolidation and may be readying to turn back up again (our favored theme).
However… with nominal yields still trending down (again, in interim fashion) the view is still disinflationary (at best, which could spring a Goldilocks flavored Santa rally) or about to morph deflationary (at worst, as current market corrections could worsen). I am going to guess that it’s a more gentle “disinflationary”. But it’s just a guess.
Bottom Line
Our big picture view is inflationary, which would imply the steepener would eventually morph that way, with nominal yields rising. That is not yet the case, however.
Personally, I lean toward a fairly broad Santa rally scenario. But I am not putting my money where that notion is just yet. A disinflationary curve steepening, if the markets do rally, would probably not benefit commodities relative to broad stocks. The “inflation trade” view is for 2026.
A deflationary steepening? In the words of the guy from the Seinfeld “Bad Chicken” episode: “That’s not gonna be good for anybody.”
So I am going to practice some patience and risk management here until I get a handle on the above. It’s been a good year, and I have every intention of ending it that way.
