2/10 and USD
July 12, 2022
–Attached is a chart of the 2/10 spread, at a new low of -8 bps at yesterday’s close. At the bottom of this note is an excerpt from the Jan 26 FOMC press conference with a prescient question from Jean Yung of MNI. She asked about the possible implications of an inverted curve, and Powell sort of brushed her off, noting that 2/10 was about +75 at the time. Well, it was a damn good line of inquiry, and here we are, with the curve signaling economic trouble ahead, even as tens are auctioned today. On the day yesterday, the ten year yield slipped back just under 3%, falling 10.4 bps to 2.99%.
–This morning NFIB Small business optimism (or lack thereof) was released. Here’s a clip from today’s press release:
“The NFIB Small Business Optimism Index dropped 3.6 points in June to 89.5, marking the sixth consecutive month below the 48-year average of 98. Small business owners expecting better business conditions over the next six months decreased seven points to a net negative 61%, the lowest level recorded in the 48-year survey. Expectations for better conditions have worsened every month this year.”
On my weekend note I mentioned that NFIB and Russell 2000 appear to be correlated and indeed, stocks are lower across the board this morning. However, USD strength is part of the equation with EUR tickling parity and US/Japan agreeing to address yen weakness (though Yellen said intervention is only warranted in rare cases).
–Barken speaks today, unlikely to be anything new. This note from Redfin getting some press yesterday:
Redfin: Roughly 60,000 Home-Purchase Agreements Fell Through in June, Equal to 14.9% of Homes That Went Under Contract That Month
***********************
From the Jan 26, 2022 FOMC:
JEAN YUNG. Thanks, Michelle. Chair Powell, some investors are expecting the yield curve could flatten, or even invert, after rate hikes begin. Would that worry you, and how important is that risk in the Fed’s consideration for adjusting policy?
CHAIR POWELL. So we, we do monitor the slope of the yield curve, but we don’t control the slope of the yield curve. Many flat—many factors influence longer-term interest rates. But it is something that we watch, and, and you will know that from when we had this issue a few years ago. And we take it into account, along with many other financial conditions, as we try to assess the implications of all those conditions for the economic outlook. So that’s, that’s one thing I would say. Another is, currently, you’ve got a slope. If you think about 2s to 10s, 2-year Treasury to 10-year Treasury, I think that’s around 75 basis points. That’s well within the range of a normal—of a normal yield-curve slope. So it’s something we’re monitoring. We don’t think of it as—I don’t think of it as some kind of an iron law. But we do look at it and try to understand the implications and what it’s telling us. And it’s—but it’s one of many things that we monitor.
JEAN YUNG. Can I follow up real quick and ask, if it—if it did invert, would you tie it to U.S. fundamentals? Or would it be driven by a much broader set of factors?
CHAIR POWELL. We’d—that’s, that’s a good question in, in real time. Obviously, U.S. long-term sovereign debt is an—is an important global asset. And it—and the fact that our rates are so much higher than, than other risk-free sovereign rates around the world may put something of a ceiling on our—on our rates. I don’t know. But it would really depend on the— on the facts and circumstances at that time.
