Bad news for stocks: This look at the Fed and the yield curve sees trouble ahead


The Federal Reserve on Wednesday opted for a dovish hike over a hawkish pause with the banking system still seemingly on fire, or as Elon Musk just tweeted, “melting.”

But whether it was the right move or not, the central bank acknowledges it might be close to the end of the rate-hike cycle, as it downgraded its views of further increases to “some additional policy firming” from “ongoing increases in the target range.”

And if the Fed is near the end of the rate-hike cycle, it also follows that the days of peak inversion have probably come and gone. The market sure seems to think so — the gap between the 2-year TMUBMUSD02Y, 3.817% and the 10-year TMUBMUSD10Y, 3.400% yield reached as much as 1.08 percentage points on March 8, but as of Wednesday stood at just 49 basis points, after SVB Financial, Silvergate and Signature Bank relocated to the big bank regulator in the sky. Deutsche Bank is now recommending a trade betting on the curve steepening for the first time in more than three years (more on that later).

Jurrien Timmer, director of global macro at Fidelity Investments, looked at the intersection of yield-curve inversions and the stock market. He acknowledges the signals are “frustratingly disparate” in terms of lead time and magnitude, but what typically happens is the market holds up for a bit, and then there are big drawdowns in the months that follow. He studied the 3-month TMUBMUSD03M, 4.584% versus 10-year inversion for his analysis.


The worst performance was after the inversion in 2007, when the S&P 500 SPX, +0.30% drawdown reached as much as 51%. Of course, that was after the global financial crisis. But other drawdowns were pretty steep too, including 40% after the 1973 inversion (oil crisis) and 39% after 2000 (dot-com bust).


Timmer posted another chart, showing both five-year cyclically adjusted price-to-earnings ratios and financial conditions indexes. Long-Term Capital Management collapsed in 1998, the Fed pivoted, and the dot-com bubble swelled in size. “I don’t see a repeat of this outcome, since we already had a similar bubble, but it’s an analog to keep in mind,” he said.

“Be careful what you wish for when it comes to Fed pivots,” he says.

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The markets

Stock futures ES00, +0.11% NQ00, +0.06% were moving higher after the big drop on Wednesday, which was tied to Treasury Secretary Janet Yellen saying there was no blanket deposit guarantee being weighed. Crude futures CL00, -0.27% were struggling to hold onto $70 per barrel.

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The buzz

Central bank decisions continue to trickle in from around the world, including the Swiss National Bank making a half-point rate hike. The Bank of England hiked rates by a quarter-point, as anticipated after Wednesday’s hot inflation data.

U.S. jobless claims fell by 1,000 to 191,000, with new-home sales data due shortly after the open.

The regional banks including First Republic Bank FRC, -6.00% and PacWest Bancorp PACW, -8.55% were trading higher in premarket trade. The Fed at 4:30 p.m. will release data for the second time on its new facility, the Bank Term Funding Program, after $2.1 billion of usage in its first few days of operation.

The short-selling research firm Hindenburg Research says Block SQ, -14.82% “systemically exploits the demographics it claims to help.”

Coinbase Global COIN, -14.05% stock fell 11% in premarket trade as the firm disclosed that the Securities and Exchange Commission is close to bringing an enforcement action over issues including its staking service.

Regeneron Pharmaceuticals REGN, +6.77% shares rose 8% after it and partner Sanofi SAN, +5.48% reported positive late-stage study data for their blockbuster anti-inflammatory drug Dupixent.

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Top tickers

Here were the most active stock-market tickers as of 6 a.m. Eastern.

Ticker Security name
GME, -5.40% GameStop
TSLA, +0.56% Tesla
FRC, -6.00% First Republic Bank
AMC, +3.00% AMC Entertainment
BBBY, -1.75% Bed Bath & Beyond
NVDA, +2.73% Nvidia
COIN, -14.05% Coinbase Global
AAPL, +0.70% Apple
NIO, +1.98% Nio
AMZN, +0.01%
The charts
Deutsche Bank

Why did Powell sound a bit more worried that European Central Bank President Christine Lagarde did last week, when the ECB hiked by 50 basis points? Deutsche Bank head of fx research George Saravelos put together these charts. “All of the above is supportive of our view that the negative impact on credit creation of the recent bank stress will be bigger in the U.S. compared to Europe and that a turn in Fed tightening will likely happen before the ECB. Related to this, a flip in U.S. curve moves from flattening to steepening is one of the most important indicators we have used as a bearish signal for the dollar.”

Random reads

A dog toy shaped like a bottle of Jack Daniel’s has provoked a Supreme Court debate.

As Credit Suisse collapsed, a few of its bankers went on an outdoor adventure trip with Bear Grylls.

Yeesh, researchers in Australia have found a “super-size” species of a pretty scary looking spider.

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