Good Monday AM,

Bonds opened in the cellar this morning.

There simply was not enough bad news over the weekend to make bonds happy. No new bank failures and the ones that have failed seem to have a plan. For my two cents, nothing has been done to stop more banks from failing. The Fed bank lending program is only a band aid. However, my opinion does nothing to help the current picture. Without the Fed visually breaking something, he will not pivot, and rates will struggle. Again, I see rates falling substantially, but for the moment the panic run is seeing a setback.

Yesterday, Minneapolis Fed President Neel Kashkari said recent bank turmoil has increased the risk of a US recession.

“What’s unclear for us is how much of these banking stresses are leading to a widespread credit crunch. Would that slow down the economy? This is something that we’re monitoring very, very closely,” Kashkari, a voter on monetary policy this year, said in an interview on CBS’s “Face the Nation.” Before this month’s bank collapses and market turmoil, Kashkari had said the Fed should lift rates to about 5.4% — from a target range of 4.75% to 5% currently — and then hold them there until inflation cooled. So there’s that,

I’ve shared a two-step process (oversimplification) in the bond markets action that identifies a recession.

The first is yields inverting and the second is them steeping. We are coming close to the second step. Bloomberg does a better job at explaining than I do, but hey, that’s their profession…

Over the last several days, the 2-10 portion of the yield curve started steepening again. It’s still deeply inverted, but it’s jumped around 80 basis points since early March.

But just because a deepening inversion of the curve is ominous doesn’t mean the opposite is comforting. The direction has been reversing because short term rates (the 2s part) have been plunging, on expectations that the Fed is now done hiking, and will be cutting rates in short order.

In fact, while everyone talks about the inversion as a recession signal (why and if that really works is for some other discussion, somewhere else) it’s the un-inversion that really precedes each recession.

Going back 40 years, each official declared recession (red bars) was preceded by a sharp re-steepening of the curve, as investors raced to price in cuts to the short-term rate before the downturn.

Obviously we know all the debates about this particular moment. It’s still TBD whether there are more banking-sector troubles ahead. It’s still unclear how much the banking shock we have seen will create a negative growth impulse. And just outside of SVB, there’s your assortment of bright spots (labor market), ambiguous spots (residential housing), and dark clouds (commercial real estate). But either way, just looking at the yield curve, there are signs that it’s behaving as it always does before the red bar.

… and on the calendar this week is (spoiler alert, Friday’s PCE is the big data to watch, this is the Fed’s favorite inflation guage):

Tuesday

• S&P Global releases its S&P CoreLogic Case-Shiller National Home Price Index for January. Home prices rose 5.8% in the year ended in December, down from a 7.6% annual rate the prior month, the lowest December-to-December change since 2019.
• The Conference Board publishes its March consumer-confidence index, which measures Americans’ attitudes toward the economy and labor market. Consumer confidence worsened in February for the second month in a row.

Wednesday

• The National Association of Realtors reports the number of home sales based on contract signings in February. Pending home sales rose in January from the prior month.

Thursday

• The Labor Department reports the number of worker filings for unemployment benefits in the week ended March 25. Initial jobless claims edged lower in the prior week, showing the job market remains strong despite announced layoffs.
• The Commerce Department releases its third estimate of output by the U.S. economy in the fourth quarter. The economy grew at a 2.7% annual rate in the final three months of last year, the second estimate showed.

Friday

• The Commerce Department releases figures on U.S. household spending and income in February. Consumer spending jumped 1.8% in January from the prior month, the largest increase in nearly two years. The department also releases its personal-consumption expenditures price index, a gauge of inflation closely watched by the Federal Reserve. The PCE-price index rose 5.4% in January from a year earlier.
• The European Union’s statistics agency releases March inflation figures for the eurozone. The bloc’s consumer prices were 8.5% higher in February from a year earlier, the fourth straight month of easing eurozone inflation.
• The University of Michigan publishes its final reading of consumer sentiment for March. A preliminary reading showed that sentiment fell for the first time in four months, mainly over persistently high inflation.

Please remain safe and stay healthy, make today great!