This will be a short update. I am working on a more extended macroeconomic essay—and I am trying to finish a short story—both of which are stealing time. In any case, I have little to say about the main themes beyond what I said last week. In the bond market, I concur with the points made early last week by Bloomberg’s Cameron Crise. Everyone knows the Fed is determined to keep raising rates, but market-pricing suggests that we are close to the end of the road for this hiking cycle. Between those contradicting points of view, the debate about the importance, or lack thereof, of the flattening yield curve has turned into a black hole threatening to consume all other stories in the bond market. I am sympathetic to that, but I don’t think the story is complicated. The 2s5 and 2s10 will invert in the next six-to-nine months, setting up an end of the U.S. business cycle towards the end of 2019 or at the beginning of 2020. At least, I think this is a reasonable base case until either of the following things happens. First, the Fed could suddenly decide that it doesn’t want to invert the curve. I doubt it, but the appointment of Richard Clarida as Vice Chair—apparently, he cares about the curve—certainly is an interesting development. Second, it is possible that the curve can steepen, or hold its current spread, even as the Fed fund rate motors higher.
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