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HIGHER US YIELDS...INFLATION OR SOMETHING ELSE?

Updated: Dec 12, 2023

An inverted US Yield Curve has been understood to predict previous US recessions. Below I explore what is happening with Higher US Yields Inflation or Something else?


Rates are continuing the trend of higher for longer since late July and the previous earnings cycle. The Yield curve on the long end has increased closer to the Fed Fund target rate at 5.25 to 5.5. Is this telling us that market agrees with the Fed that inflation is still to high? or is something else driving up rates.

US Treasury Yeilds
Treasury Yields Increasing Month on Month

Markets are predicting however expectations of rate drops into 24 and 25. With economic data at present showing a strong economy, with increaseing GDP growth, tight Labour Market, growing ISM Non Manufacturing sector and Global PMI now out of contraction territory. With necreasing CPI YOY, why is the market pricing in higher yields?

Analyst predictions of Fed Funds
Forecasted Fed Funds Rate

It could be that Market participants are now looking past a too strong economy, or the possibility of inflation increasing once again. Instead looking at government fiscal spending getting out of control. You see deficits occur when federal spending exceeds revenues, over the long term large deficits indicate a structural imbalance with the federal budget. The forecast for the US economy indicates that the federal deficit is on track to increase from 5.9 percent of GDP in 2023 to a substantial 10.0 percent by 2053. This trajectory, coupled with slower economic growth, presents a greater challenge in managing and reducing the national debt relative to GDP.

Deficit to GDP%
Deficit as % of GDP is looking Bad into the future

With the Market fixated on rates at the minute alongside geopolitical risks, inflation, and growth concerns into the future. The S&P 500 has dropped just over 10% since its 1Y high on the 27th of July.

S&P 500 Chart
S&P 500 Year to Date - Max Updside and Drawdown Since July

Looking forward I'll be paying close attention to earnings reports and what is driving or stifling growth in the near term. Things to look out for are the servicing of dept, operating margins, spending habits of consumers and KPI metrics specific to industries. If you want to learn more about financial markets and how to trade in a professional manner check out my reviews of The Institute of Trading and Portfolio Management (ITPM). I am an Alumni and Mentee of the programme and can offer students like me a 50% discount on there courses. Check out theinstitutetrader.com

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