OTC (Off The Charts) Thoughts
OTC #1.
OTC Ideas is a play on "Over The Counter" and "Off The Charts". For this column, I would be sharing my personal thoughts on the markets in general and probably explore investment theme and ideas.
OTC Ideas is a play on "Over The Counter" and "Off The Charts". For this column, I would be sharing my personal thoughts on the markets in general and probably explore investment theme and ideas.
Today, I will be exploring a key theme in the markets: The Interest Rate Story!
With so much focus on the US Fed rate cut / pivot etc... I look to answer 2 questions which i think are important to investors and traders out there.
With so much focus on the US Fed rate cut / pivot etc... I look to answer 2 questions which i think are important to investors and traders out there.
Some key questions to be asked:
1. When is the US Fed going to pivot and start cutting rates?
2. What happens to the equity markets when rates start getting cut?
1. When is the US Fed going to pivot and start cutting rates?
2. What happens to the equity markets when rates start getting cut?
With yesterday's CPI data, we see that MoM, prices have maintained at 0.4% from January and Core CPI YoY actually increased to 3.9%. With inflation higher than forecasted, the US Fed definitely will take this into consideration when deciding on when to cut rates.
Other than CPI data, another interesting data to observe was the recently concluded US 10year auction. This auction is important as the 10year yield is one of the 2 main components in the US yield curve (US 10-2 spreads). With the latest auction, the 10year yield climbed higher from 4.09% to 4.16% before settling at 4.14%. This is still below the 2year yield of 4.58%. As long as the 2 year yield > 10year yield, the yield curve will stay inverted (below 0.00%). This is what we are currently seeing now.
At the moment, the US Fed is cautious about cutting rates too quickly, as such an action could lead to a market crash. We also know that the current market consensus is 3 rate cuts this year, 25bps each time. But will the US Fed play to the market consensus or take a more aggressive approach similar to the ones we saw in 2023? History would teach investors to look to the US Yield Curve (US 10-2 spreads). Before I dive into the yield curve, do know that the US Yield curve currently has been inverted (below 0.00%) for a consecutive 423 trading days!
History never repeats itself, but it often rhymes - Anonymous
While not a statistically significant sample size, the last two times the S&P 500 index crashed was during the 2001 dot-com bubble and the 2008 Great Financial Crisis (GFC). Both times, the sequence of events played out the same way (as seen from the chart above):
1. US yield curve inverted (went below 0.00%)
2. S&P500 index is toppish
3. US yield curve steepens (goes back above 0.00%)
4. S&P500 index crashes 2-4 months later.
1. US yield curve inverted (went below 0.00%)
2. S&P500 index is toppish
3. US yield curve steepens (goes back above 0.00%)
4. S&P500 index crashes 2-4 months later.
Conclusion to the questions at the top of this article:
Yes, the yield curve is inverted. Even though it is flattening now, we are still quite a distance from crossing back above 0.00%, aka steepening. Assuming that the Fed does start rate cuts in June, it will still take quite a series of cuts (my guess is more than 3) to take us back above 0.00%. Following the squence of events laid out in the 4 points above, and projecting the time and space required in the markets, we may not even see a severe market crash (like the past 2) this year. Corrections? Yes. Market crash? No.
Yes, the yield curve is inverted. Even though it is flattening now, we are still quite a distance from crossing back above 0.00%, aka steepening. Assuming that the Fed does start rate cuts in June, it will still take quite a series of cuts (my guess is more than 3) to take us back above 0.00%. Following the squence of events laid out in the 4 points above, and projecting the time and space required in the markets, we may not even see a severe market crash (like the past 2) this year. Corrections? Yes. Market crash? No.
#Trading #Investing #Interestrates #bonds #yieldcurve #markets
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only.
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SpyderCall : Good read.
You are totally right. Past recessions did not occur until the yield curve uninverted and then began to steepen.
This makes more sense when you think about the available liquidity in the markets. When yields are higher at the short end of the curve, especially the very short end like T-Bills, then investors are gaining more liquidity at maturity to move into other assets like equities. As soon as short-term yields start dropping, then that short-term liquidity dries up accordingly, and less capital is available to rotate into other assets.
Once investors realize that there is no more liquidity to push up asset prices, then they might assume a top has been formed, and begin to sell.
Isaac J Lim OP SpyderCall : Sorry for the late reply. Just saw this!I think this view is still very valid going forward into H2 2024..Will share my thoughts soon!