Are The Treasury Yield Curve And The Economy Wily Often

The economy has performed very well since Apr. 19 [F], as shown in Table 1, but the Treasury Yield Curve [TYC] has been coupled with the S&P 500 Index only one week from Apr. 19 to 26 [F], as seen in Table 2.

As reading Table 2, S&P 500 (or Economy) and TYC coupled nicely the week, ending Apr. 26 [F], called “Stage One” [“S.1”], decoupled surprisingly in the following week, called “Stage Two” [“S.2”], and were neutral in the last week, calling “Stage Three” [“S.3”].

In S.1, as reported here, on Apr. 22 [M] YCS (Yield Curve Stiffness) was -66BPs which is far less than +200BPs, so that it should increase to +266BPs (= 200BPs – (-66BPs)).

On Nov. 8, 2016 (election day), however, 1M and 30Y were +28BPs (0.28%) and +263BPs (2.63%), respectively, as found here, so TYC was normal, printing that YCS was 235 BPs (2.35%) (=+263BPs – (+28BPs)). On Friday (Apr 26) YCS moved higher, logging 7 BPs, and S&P 500 surged +2.27%.

In S.2, both are detached from each other, so they can move any way with no restriction. This development would be welcomed by most investors, but in the stance of monetary policy and the stability of the global financial system [GFS], the detachment should pay a toll.

Did you see a kite, flying freely to the blue sky, after the line was cut? Some players cried for losing their kites, but someone’s excited for the freedom of their loved ones. What kind of player are you? In the Fed’s stance, two parties must tightly stick together.

In S.3, the decoupled two parties have moved towards being less detachable or more attachable by a policy mix of monetary policy and financial: In other words, the Open Market Desk [OMD] of New York Federal Reserve Bank, and Treasury Department must corporate closely.

Treasury manages Treasuries efficiently to have an optimal distribution of maturities of Treasuries, while OMD routinely buys and sells Treasuries to get an optimal TYC finally, online 24/7/365.

As a consequence, TYC, which is the control tower, overlooking all disequilibrium, big or small, resolves one by one with different process time-line, toward an upward slope to the right, getting +2% of the YCS. S.2, increasing inversion, was a dangerous status to damage the GFS.

Treasury is in a good hand, and OMD is equipped with OMOs (traditional short-term Open Market Operations) and POMOs (new long-term Permanent Open Market Operations). OMD and Treasury, therefore, could promptly change from S.2 to S.3, being neutral.

In sum, Table 2 is a handy and reliable guide to watch the condition of the GFS. Another GFC (Global Financial Crisis) can be avoided ultimately when the Fed and Treasury together will succeed to fix the problem of TYC in the future.

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Pulse Check #1 by The SDI (Sector Diffusion Index)

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The First Checker, The SDI logged 57% in Mar., and 47% in Apr., and 73% on May, 10 [F] in Table 3, which are upbeat optimal.

If any reader is interested in any sector among 11, for example, XLF (Financial), you can check its daily dynamic fluctuations, recorded 7″P”, including 4 days in a row, and 1″m”, out of 8 days in May, which was quite different from April, reading here. It’s an interesting information.

Pulse Check #2 by The TDI (Trifecta Distribution Index)

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The Second Checker, the TDI was 61% (= 100 * 11 / (11 + 7)), registering that Bulls vs. Bears was 11 (= 5 (Apr) + 6 (May)) vs. 7 (= 7 (Apr) + 0 (May)) in Table 5.

The TDI was 61% which was upbeat optimal.

If you are a trifecta trader, you must be interested in summary Table of Table 5. and “TP/Tm” column in Table 4.

Pulse Check #3 by The Uptrend and Other Indicators

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Third Checker, the Uptrend was 53% (= 100 * 16 / (16 + 14)), registering that Bulls vs. Bears was 16 (= 8 (Apr) + 8 (May)) vs. 14 (= 12 (Apr) + 2 (May)) in Table 6.

The pulse in the uptrend, 53%, was upbeat optimal.

Other indicators, the Super Bull Market [SBM], starting in Mar 2009 and the Great Expansion [GE], started in Jun 2009 are still with us, as of May 10 [F].

The Market Perspectives

Friday (May 10) the New York Fed Staff Nowcast released 2.2% in Q2, 2024. There were no data releases this week, leaving the estimate unchanged. News from last week’s data releases decreased the estimate by 0.6%. Negative surprises from international trade, and ISM manufacturing survey data were the causes of the decrease.

Friday (May 3), the Labor Department said Nonfarm Payrolls increased 175,000 during April, down from an upwardly revised 315,000 in March and the smallest monthly increase since last October. Payrolls fell short of expectations for a gain of about 250,000. Additionally, average hourly earnings rose just 0.2%, below expectations for a 0.3% gain—what some saw as an encouraging sign on inflation.

Treasury yields fell sharply as bond traders priced in expectations the Fed may cut benchmark rates earlier in the year than previously thought. The 10-year Treasury note dropped to near 4.5%, its lowest level in over three weeks.

Major U.S. equity indices finished mixed Friday (May 10) but posted advances for the week as investors braced for key monthly inflation updates next week. S&P 500 ascent for a sixth session out of the past seven and notched its third weekly gain, despite a sharp drop in consumer confidence that raise concern over the economy.

Conclusion

The pulse of the bull plateau was checked thoroughly by the SDI (the primary checker) as 73%, the TDI (the secondary checker) as 61%, and the uptrend as 53%, concluding the pulse is upbeat optimal, ranging 73% – 53%, which are much higher than the previous week.

As a consequence, the plateau is healthy enough to run 3 years more until 2007. Therefore, a “Bear Market” will replace the SBM in 2027, and about six months later, a “Recession” will replace the GE.

As a consequence, in my prediction, we will finally get the right business cycle chronology back, by getting a “bear market” as a leading indicator comes first, and then a “recession” as a coincident indicator follows.

The Bond market has been patient for several years, but in my observation, TYC has been far overdue for normalization.

Two weeks ago, ending Apr 26, TYC was improved by the increased flattener, by lifting the yields of long ends such as 30Y and 10Y, and a bit change on 1M and 2Y, as S.1.

In the following week, ending May 3, TYC’s the flattener changed back to the bad shape of the week, ending Apr. 19 [F].

On May 10 [F], TYC improved to the neutral position. It’s very uncertain period of TYC and Economy (or S&P 500), although the equity market has surged recently.

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