Quiet Stock Markets Mask Critical Yield Curve Developments
The S&P 500 closed higher, propelled mainly by Apple (AAPL), while the equal-weight index ended the day essentially unchanged—highlighting the lone standout in an otherwise uneventful session.
Despite the upward move, the S&P 500 spent the afternoon stalled at the 61.8% retracement level, effectively revisiting Tuesday’s highs.
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There were 121 more decliners on the NYSE today than advancers.
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The 10-year minus 2-year spread is once again setting up for a potential upside breakout, opening the door for yield curve steepening. While the exact timing remains uncertain, the opportunity is clearly there if the breakout finally occurs.
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I’ve generally maintained the view that the yield curve would steepen via a bear steepener. Considering rising inflation expectations and the recent uptick in the ISM Services Prices Paid index, a bear steepening remains my base case. However, that doesn’t rule out the possibility of a scenario where the steepening arises from a combination of the 2-year yield declining and the 10-year yield rising, particularly if stagflation concerns begin to surface.
The 30-year minus 3-month spread is in a similar situation, consolidating around 60 bps and positioning itself for a potential breakout.
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The spread between the US 5-year and 5-year JGB contracted today and is nearing a breakdown below its August 1 low. The tighter this spread becomes, the more likely it is that USDJPY will continue strengthening against the dollar.
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This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. ...
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