Economic slowdown chart pack: peaking Treasury yields, Fed's permission to hike, and steady ol' bitcoin
The economic slowdown is here, and peaking inflation should correspond with peaking Treasury yields.
Rates are about to turn lower, in my opinion. I haven’t been shy about this—it’s been four weeks since I wrote “There is no bubble bursting in Treasuries” about how an inflection point was upon us. We’ve had important price signals since then, especially breaches of the 3% level by Treasury across the yield curve. The Bitcoin Layer is in urgent need of a chart pack.
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Tightening financial conditions are starting to slow the economy.
Long-term Treasury yields are peaking.
Treasuries and “credit” are not the same thing.
The Fed has plenty of room to aggressively hike rates this year, specifically a 27% crash buffer on tech stocks.
Bitcoin is stubbornly holding on to higher lows.
Assessing the impact of the Fed’s forward guidance and higher yields on the economy
As I wrap up another fantastic semester at USC Marshall School of Business teaching the bond market, I realize how much of my job involves financial literacy. I’m not talking about understanding checking accounts, credit cards, and spending less than you earn, rather a more advanced literacy pertaining to cycles in the global economy, the easing and tightening of financial conditions, and how monetary policy impacts it all. Themes of this advanced financial/economic/monetary literacy continue to be featured within this publication, and I’ve started to embrace the role.
One the basics of advanced literacy is understanding the balance between financial conditions and the state of the economy. All else being equal, tighter financial conditions (think higher interest rates) will slow down an economy. This process is well underway.
Keep in mind the Federal Reserve has barely tightened policy with its actions. Most of its policy adjustment is still in the form of communication—projections of the policy rate by members of the FOMC are above 3% by next year, while the current rate is still closer to zero than it is to 1%. The market has gone ahead with the rate hikes, as most of the Treasury curve now trades near the 3% level. This is already impacting the economy.
Mortgage rates have topped 5%, officially bringing the scorching real estate market under watch. Year-over-year price increases are near 20%, a tough hurdle to overcome with affordability swiftly declining amidst high rates and elevated prices. While price increases are likely to remain positive, the rate of change of home price increases will be negative over the coming months. This slowing will trickle down into other parts of the economy, as well as appear independently in other sectors outside of housing.
A key domestic economic indicator, the US ISM Manufacturing, is now one year removed from its high of the cycle. Looking back at the past couple decades, this measure peaks every 3 to 4 years, and the last one was in 2018. The current peak was in March of 2021, and I’ll be watching this and other global PMI data to see how quickly the economy is deteriorating, and whether or not it’s heading for outright contraction. Either way, the slowdown is here. Incoming charts.