The bond market is sailing smoothly into the Fed meeting next week. There is still a 97.4% probability that the FOMC votes to drop rates by 1/4% on the 31st. No economic reports of significance have been released this week, but we’ll see GDP, PCE, & Personal Income & Spending on Thursday and Friday. Even if those don’t move markets in and of themselves, they will be carefully monitored by, debated, and expounded upon by the Committee on the last day of January.
Markets are hoping for a soft landing as the 2-10 spread is trying to get positive for the first time in a year and a half. You can see the the last five years’ activity in the graph below. Almost without exception. recessions occur some months after the 2-10 regains positivity. You can see an example of that on the left side of the chart when the Spread turned negative in August 2019 and a recession occurred in February-March of 2020. The recession is illustrated by the gray bar in the image below.
The 2-10 Spread has been inverted since June 2022, which is the deepest and longest such move since the early 1980’s. To escape a recession this year would be miraculous, and would cause me to wonder about what greater effects the economy would sustain further down the road without the natural byproduct of recessionary activities in the nearer term.
Gratefully, I am a mortgage loan officer and not an instigator of public policy. As such, I with you wait as a bystander in anticipation of future developments.
