Yield curve that ‘almost’ issues is now inverted

There’s extra proof that inflation has peaked, however the U.S. is unlikely to keep away from a recession that would hit more durable than most count on, Jefferies strategist Christ Wooden says.

A latest yield curve inversion spells bother from the year-end rally narrative, Wooden wrote in his “Greed and Concern” word Friday.

“The important thing consequence of the latest Treasury bond rally (TBT) (NASDAQ:TLT) (SHY) is that the yield curve that just about issues, by which GREED & concern means the connection between the federal funds charge and the 10-year Treasury bond yield (US10Y), is now correctly inverted for the primary time on this tightening cycle,” Wooden mentioned. “And that is earlier than the virtually universally anticipated additional 50bp charge hike within the federal funds charge at subsequent week’s FOMC assembly on 13-14 December.”

“The unfold between the 10-year Treasury bond yield and the federal funds efficient charge has declined from 116bp in late October to a unfavorable 41bp on Wednesday, probably the most inverted place because the Covid-triggered risk-off panic in March 2020, and is now a unfavorable 38bp,” Wooden added.

“All that is additional proof of the rising chance of a recession within the US in 2023,” Wooden mentioned. “On this respect, it has been attention-grabbing to GREED & concern that Jefferies’ chief US economist, Aneta Markowska, has been making the purpose for a while that the recession will come later than the consensus expects however will hit more durable.”

“From conferences in latest weeks it’s clear that there’s a rising narrative that has been driving the ‘risk-on’ rally in latest weeks heading into 12 months finish,” he mentioned. “That may be a rising conviction that inflation has peaked, mixed with mounting hopes that America can keep away from a recession subsequent 12 months.”

“If that’s the sentiment, GREED & concern would agree that the peaking-out-of inflation viewpoint has far more to commend itself now than was the case in the summertime when the identical theme drove that counter-trend rally earlier than the US inventory market (NYSEARCA:SPY) (QQQ) (DIA) turned down once more in August,” Wooden mentioned.

However he’s “a lot much less satisfied of the avoidance of the recession story and due to this fact views latest inventory market motion as a basic counter-trend bear transfer, most significantly as markets have historically tended to rally into year-end.”

SPY noticed almost $7B in outflows on the week.