Yield Curve Inversion, Market’s Expectations of Federal Funds Rate, and Inflation’s Effect on Discretionary Spending

The long end of the yield curve just inverted for the first time since 2006. The flattening yield curve reflects the market’s expectations of future Federal Reserve tightening and its impact on the economy. The market now expects a rapid increase in the Federal Funds rate up to 2.50%. Rising rates are making bonds more attractive compared to equities. Headline year-over-year inflation of 8.5% was primarily driven by higher energy prices. Rig counts continue to move higher but with no increase in the rate of change. Consumers are planning to cut back as inflation eats into their budgets.

1. The rapid rise in the 10-year Treasury rate has inverted another portion of the yield curve:

Source: The Daily Shot from 4/10/22

2. It’s notable that the yield curve hasn’t steepened as long-term rates have risen:

Source: The Daily Shot from 4/14/22

3. The market’s expectations for the Federal Funds rate keep increasing:

Source: The Daily Shot from 4/10/22

4. Higher interest rates mean higher forward returns in fixed income, while equity valuations haven’t changed:

Source: Truist Advisory Services

5. The monthly change in “Core” CPI has slowed in recent months, but it still running over 4% on an annualized basis:

Source: Wells Fargo Securities

6. Rig counts continue to increase, but there doesn’t seem to be a sense of urgency even with oil prices over $100 a barrel:

Source: The Daily Shot from 4/8/22

7. Discretionary spending may take a hit if inflation continues to outpace wage growth:

Source: @WSJ   Read full article