UST 10-Yr-2-Yr Yield Spread Inverts Again; All Eyes on FOMC

In one of the quietest trading periods of the market year, while many investors and traders are lolling on the beach or hiking in the mountains, the U.S. Treasury 10-year-2-year yield spread inverted again. Consequently, all eyes are on the Sept. 18 Federal Open Market Committee meeting. As of Friday, the 10-year yield was 1.50% and the 2-year at 1.50%.

Meanwhile, the economic data keeps arriving that again points up the conundrum for the Federal Reserve Board and its chairman, Jerome Powell. According to the Commerce Dept., the economy is growing with support from the U.S. consumer. It revised down slightly its estimate of overall second-quarter economic growth to an annual rate of 2.0% in the second quarter, compared with the previous estimate of a 2.1% rise.

Corporate profits rose 4.8% from the prior quarter, the department said, which followed a 1.5% drop in both the first quarter of this year and the fourth quarter of 2018. It was the largest quarterly rise since the first quarter of 2018, just after the corporate tax overhaul became law. Additionally, personal-consumption expenditures, a measure of household spending, increased 0.6% in July from June.

Not gangbusters growth, but this is problematic for the Fed, as it grapples with perhaps having to lower interest rates not to combat a recession but prevent one.

Then there’s that intermittent U.S. Treasury bond 10-year-2-year yield inversion. As I have noted before, this isn’t the best signal of a coming recession, often giving false alarms. I prefer the 30-year-10-year yield spread, which currently remains solidly positive at about 45-50 basis points.

Foreign investors continue to pile into U.S. bonds at the fastest pace in about a year, thanks to the negative returns on most other developed nation bond markets. They bought nearly $64 billion of U.S. stocks and bonds in June, the largest sum since August 2018, according to the Treasury Department.

A little bit of late summer political frisson was introduced into the Trump-Fed picture by a former New York Fed President William Dudley. Effectively, he wrote in a Bloomberg opinion piece that the Fed should help defeat President Trump in 2020. “Officials could state explicitly that the central bank won’t bail out an administration that keeps making bad choices on trade policy, making it abundantly clear that Trump will own the consequences of his actions,” Mr. Dudley wrote. He essentially says the Fed should join The Resistance, according to The Wall Street Journal opinion page.

Wow.

The 10-yr note yield ended Friday around 1.50% versus 1.52% the previous week.

Upcoming: 9/17-18 - FOMC meeting. Pass out the party favors.

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