Treasury yields from the New York Fed, chart by Mish

Anticipating where the 3-month yield will be in May is much easier than figuring out where the 10-year yield will be. 

The Fed has penciled in quarter-point hikes in February and March with decent odds of yet another hike in May. The market agrees with that assessment.

Target Rate Probabilities for May 3

Target rate probabilities from CME Fedwatch

The Fed's Commitment and Credibility 

Numerous Fed officials have repeated they will hike more than the market expects and stay there longer. 

I don't doubt that unless something breaks in a major way. If the Fed gets in hikes in February and March, then the 3-month Treasury note will start inching towards 5 percent possibly as soon as April. 

The Fed ridiculously kept QE going all the way to March of 2022 for no reason other than it said it would. 

Supposedly, that maintained credibility. They did not want to shock the market by doing something unexpected.

Now, the Fed has promised to hike rates more and stay they longer. They probably will do so to maintain credibility.

The Fed would have more credibility if it did not yap its intent to market Pavlov's dogs. Forward guidance blew up in the Fed's face and I expect that to happen again.

Yield Curve Comments

"Possibly the most robust indicator of an impending recession is when the Fed dismisses the inverting yield curve as a predictor of an impending recession."
ht @albertedwards99

Fabulous chart by @TaviCosta pic.twitter.com/TvAaGvDqde

— Ronnie Stoeferle (@RonStoeferle) January 6, 2023

No Recession Until When? 

Despite the Treasury yield curve being inverted for the ninth time since 1968, economist Campbell Harvey says it’s probably not a harbinger for a recession https://t.co/3yxo1c7iU0

— Bloomberg Economics (@economics) January 4, 2023

I saw a Tweet yesterday that caught my eye but I can no longer find it.

It said "No recession until the yield curve steepens." Well the curve has been steepening, just not in the normal sense.

I don't buy the theory. Here is a similar Tweet.

The spread between the US 3M yield and the US 30Y yield widens every day. That is an indication that those calling for an imminent US recession have no idea what they're talking about. The countdown to a recession will start only when the yield curve uninverts(many months away). pic.twitter.com/T8lEKl2A0H

— CyclesFan (@CyclesFan) January 6, 2023

No 2023 Recession

Everyone and their mothers are expecting a US recession in 2023.

Dusted off a method like the NY Fed's 10Y/3M yield curve.

At today's level, it took 16 months to an actual recession in 1970, 1973 (4), 1980 (11), 1990 (10), 2001 (6), 2008 (16), 2020 (6).

My intuition: not 2023 pic.twitter.com/dNUCFmnFPz

— morsa (@wisdomfarer) January 8, 2023

Economic data has been terrible and I expect huge negative revisions to jobs, income, and GDP at some point. 

It would not at all be shocking if we were in recession already. 

Sobering Thought on When the Market Bottoms

While the 3m10y yield curve is a very accurate recession signal, it includes a big lag, and that lag says the low is some months away.

The odds of a low aren't realistic until 12-18 mos *after* inversion (about 62.5%).

There is only a 25% chance the lows arrive within 1yr. 1/ https://t.co/2Qty7wDNaP pic.twitter.com/GQ2Sgs0IRu

— 𝐓𝐗𝐌𝐂 (@TXMCtrades) January 8, 2023

Existing Home Sales Decline 10th Month

Existing home sales from the National Association of Realtors via St. Louis Fed

 Never before have we seen a housing collapse like this outside of recession. 

Terrible Economic Data

The December jobs report was anemic and the ISM services PMI was an outright disaster.

• December Jobs: Employment Rises by 717,000 All of Them Part Time
• ISM Services Plunges 6.9 Points Into Contraction, Another Recession Warning
• Stock Market Cheers Weak Job Report, But Big Picture Still Looks Grim

Although housing in the gutter and the rest of the economy sinking fast, the Fed iscommitted to a course of action to maintain credibility. 

So don't count on the yield curve steepening as a signal. 

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