The Speed Of Sour: LIBOR Now Inverted, Too

Last week, for the first time since February 2008, the LIBOR curve inverted. The 3-month tenor has been on the move downward for some time. The 1-month rate has been gentler in its slope. Last Thursday, the two finally crossed. As unnatural as inversion in the UST curve or elsewhere, it’s another sign of imminent rate cuts.

I am somewhat reluctant to point out how it was on August 9, 2007, when this same thing happened for the first time last time around. It doesn’t mean we are repeating 2008, only that the market perceives substantial negative factors which are going to lead the Federal Reserve to begin reducing the interest it pays on its money alternatives soon.

Almost certainly at the end of next month.

The stock market view of all this is predictably one of near giddiness – more punchbowl! This is shared to a lesser extent by policymakers themselves. They are in public claiming that one or any rate cuts are nothing more than insurance for an otherwise strong economy to stay that way.

The problem with the two is that in many ways they rely on each other. It was, after all, record high share prices which encouraged Chairman Powell to be more hawkish in early 2018 after the uncertain start to his tenure. And then, a year later, it was the rebound in stocks following November and December’s plunge (the landmine) which kept the FOMC from outright panicking.

Just today, Mr. Powell said that one month ago things were looking up:

When the FOMC met at the start of May, tentative evidence suggested these cross-currents were moderating, and we saw no strong case for adjusting our policy rate.

What “tentative evidence?” The only markets which were suggesting an improvement were those share prices at the NYSE being set by the idea of a dovish Fed. Everyone then ignored what was otherwise a consistent downturn in the real markets. They quite conspicuously skipped right over April 17 even though it showed up in their own backyard (federal funds).

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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