The Yield Curve Screams Recession

Federal Reserve Chairman Jerome Powell said the Fed could hike rates more and more often. This resulted in stocks being down a little, gold being down a lot, and the yield curve doing one of the most incredible permutations I’ve ever seen.

It was a massive flattening, which is to say that the inversion became even more inverted—at the time of writing, the yield curve, as measured by the spread between two-year and 10-year interest rates, is 102 basis points inverted. I’ve had a long (though not always illustrious) trading career, and I’ve never seen anything like this.

The bond market is screaming that there is going to be a recession, and now it seems certain that the Fed is overtightening. You see, this all started with last month’s payroll report showing that we added over 500,000 jobs in the month of January. A lot of people questioned the verisimilitude of that data, saying that the seasonality calculations might have been wonky, or it could have been due to warm weather.

Nonetheless, the headline number had a big psychological impact, and Fed officials—namely James Bullard—spent the next month talking up short-term rates. We’re going to get another payroll number tomorrow. Economists expect 224,000 jobs to be added. We’re also getting CPI next week.