Is the 10yr signaling an over-restrictive Fed?
Macro Perspectives
We looked at this chart of the S&P 500 last week ...
As we discussed, stocks closed above the 200-day moving average (the blue line) for three straight days.
Moreover, heading into this past Friday's jobs report, stocks were trading into the descending trendline (in green) that represents the eleven-month decline from record highs.
As you can see, that trendline held.
Stocks are down 4% from that point, and have now fully retraced the rise that was attributed to Jerome Powell's (relatively) dovish statements at his Brookings Institution discussion last Wednesday.
Importantly, what hasn't retraced? Yields.
The yield on the 10-year Treasury closed at 3.52% yesterday - that's 30 basis points lower than it was trading when Jerome Powell spoke last Wednesday.
This comes after Friday's hotter than expected wage growth and after Monday’s hotter than expected ISM services report. Remember, it's "services" that have been a hot spot in the Fed's assessment of inflation.
This behavior of the world's benchmark interest rate (the 10-year yield) continues to send a signal - it may be signaling an over-restrictive Fed (already), which will translate into falling prices (deflation) in the coming months, perhaps starting to show as soon as next week's November inflation report. We will see.
By the way, Bank of America has taken a look at the past thirteen Fed hiking cycles. Dating back to 1954, when the Fed stops hiking, stocks rise, on average, 14% over the following twelve months.
