Yes, the headlines report inflation, price increases are lower the last few months. Problem is, the bond market does not believe it.
The ten-year Treasury note yield is the most quoted in the press. It bottomed intra-day February 2 at 3.33%. Today, two weeks later, it has risen to 3.9%. The two-year yield fell to 4.2% and now has risen to 4.6% in the same frame. This means the yield curve remains inverted. Short rates are higher than long rates showing concern over rate increases. This has preceded a recession in every instance since the end of WWII.
The Big Picture on Rates
We will have more to say on this in future columns, but here is the real worry. Interest rates ended their 39-year decline from 1981 to March, 2020. The new 39-year cycle (increasing rates) has begun and there is nothing any president or the FED can do about that cycle.
Congress has been on a blow-out spending binge. Total admitted national debt is around $30 trillion and the annual Federal Budget now exceeds the Gross Domestic Product. The last time that happened was the end of WWII. The determination to end the war with massive spending is understandable, the situation today is not.
Point is, massive spending is occurring as rates are increasing. This will cost an ever increasing larger part of the budget just to service the debt. Already reports are surfacing suggesting at what point higher interest rates will take the lion’s share of expenditures leaving less and less for defense and entitlements. This is not an if but a when future event.
Markets
Stocks remain range bound with the DJIA trading between 33,600 and 34,200. Markets need to break out above that high with a weekly close. That requires a 700 point DJIA rally from here.
Crude oil has traded between $72 and $82. The Permian Basin is literally the production engine keeping supply adequate to meet demand. Otherwise, oil prices would be much, much higher. In fact the anti-oil regulations of Team Biden have lifted prices to this level. Gasoline futures are suggesting higher prices for the entire energy complex, already back to the January high of $2.70, and the moving averages are coming together. This is always a precursor to a change in direction. Couple that with the rise in interest rates already cited. Sounds like inflation is just taking a needed corrective rest, higher prices and interest rates lie ahead.
