Pro Perspectives 2/16/23

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February 15, 2023
 
As we discussed yesterday, contrary to the consensus Wall Street view coming into the year, we're a month and a half in, and no signs of the economy faltering.
 
In fact, it's the opposite.  Here's a look at Citibank's index that measures surprises in the economic data (relative to consensus expectations)…
The bounce back in economic activity in January has been strong.  Despite the Fed's best efforts, the job market remains tight.  And with the resilience of the job market, a sense of job security is good for confidence.  With that, confidence is coming back from record low levels of the early 80s ….
This has come with hotter prices in January (both consumer prices and producer prices).  And hotter prices, combined with positive surprises in economic data has put a fire under yields, finally.
The purple line in this chart is the 10-year yield. This is the benchmark market-determined interest rate, which is the basis for setting many consumer rates. 
 
As you can see, market interest rates (purple line) have moved in the opposite direction of the Fed (orange line), through the past few rate hikes.  So, as the Fed was (and still is) projecting 5.1% as the ultimate stopping point for the Fed Funds rate, the 10-year has traded as low as 3.32% over the past month.  
 
Keep in mind, as the bond king, Bill Gross, has pointed out, historically the 10-year yield trades, on average, 90 basis points ABOVE the Fed Funds rate.  On that note, the bond market is thought to be the "smart money."  Does that mean it's right on the recession forecast?  
 
If the bond market were that "smart" why didn't the 10-year yield trade north of 9% when inflation was brewing in 2021?  
 
Why?  Because the government bond markets have been highly manipulated by central banks, globally — suppressing market interest rates.  It's safe to assume that's the only reason, at this stage, the benchmark 10-year yield trades in this 3%-4% range.