The Fed is slapping bond traders
who is fooling who
Bond traders have been having a rough go at it. For some, this is the worst time since the 70s. There has been a significant flattening of the yield curve and yesterday saw the 10 year minus the 2 year go negative for a short period during the trading session. By the end of the day it traded back into positive territory but only slightly.
It is down to 6 basis points. I believe it is only a matter of time before it goes negative and stays there. The Fed has had no reaction to the flattening of the yield curve nor the 10-2 recession indicator flirting with negative territory. Fed Chair Powell has charted their course and does not seem to be in a rush to deviate from it. He states that he is using employment indicators and the PCE to guide policy. This is why the Fed is behind the curve. They look to the past to guide the future. They pay attention to lagging indicators and aren’t mindful of the present.
The latest lagging employment indicator, the ADP employment report, came out today. It brought great news for Powell and co.
Employment has finally recovered from the economic shutdown in 2020. According to ADP, employment is now higher than it was pre-pandemic. Expect victory laps from the Fed and the Biden administration on the employment data.
Yesterday, my favorite inflation indicator dropped, the Case-Shiller home price index.
The index has begun to turn higher again. After peaking in August, it spent the last three months drifting lower. Now it is pushing towards the high again. I feel this index leads the CPI. Here is a comparison:
Shelter costs are a large component to the CPI and the way they are calculated lag the Case-Shiller index. I expect future CPI releases will push the shelter component higher.
Tomorrow the Fed releases their favorite inflation tracker, the PCE. On Friday we get the unemployment rate and other employment data. Expect a low number on unemployment and another victory lap from the Fed, mainstream press, and the Biden administration. These employment figures are an illusion. They are a trick to distract from the crumbling of the economy. How can things be bad if unemployment is so low, they’ll state. What they don’t mention is the recession that is creeping along in the background.
