Below is a chart and brief excerpt from today’s Market Situation Report written by Tier 1 Alpha. If you’re interested in learning more about the Hedgeye-Tier 1 Alpha partnership, there’s more information here.
Today's bonus chart offers a glance at the yield curve, noting that the bear steepening observed over the past three months has paused, likely due to softer CPI and PPI figures. Typically, a yield curve normalization heralds an official recession, and current trends suggest we're navigating this shift. With Chairman Powell's stance on maintaining higher interest rates for an extended period and the recent soft CPI data, the short end of the curve is descending more gradually than the long end. As recession signals become clearer to all and sundry, the front end of the curve will become one of the only things to buy, forcing the short end of the curve down and finishing the bear steepening. Consequently, we believe it's prudent to start buying the short end incrementally now.
The recent bear steepening can be partially attributed to expectations of persistent structural inflation. This is a type of inflation that is ingrained in the economy and can be due to factors like rising wages or production costs and the green economy. However, cyclical inflation, which is associated with fluctuations in economic activity, is decreasing. This reduction is result of decreased real economy money printing and decreased credit creation from banks, as opposed to quantitative easing, which traditionally injects liquidity into financial markets without necessarily translating directly into consumer inflation. The reduction in money printing aimed at stimulating the real economy is tempering demand-pull inflationary pressures, even as underlying structural inflation remains a concern.
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