Yield Curve Steepens, Dollar and Gold Firm
To the bewilderment of many...
The US DOLLAR and gold have both been firm against a steepening yield curve, writes Gary Tanashian in his Notes from the Rabbit Hole.
It's a deflationary yield curve steepener, as evidenced by both the 10yr and 2yr yields dropping and the long end of the 10-2 yield curve doing this:
So how is your local Twittter inflation influencer rallying the troops lately? Anyone? Bueller? Larry? Anyone?
Sure, it took a while. But Larry's "fuck you" of summer 2021 was not a sign of mental toughness. It was a sign of vulnerability at the hands of dogma.
I still remember his herd tweeting "you tell him, Larry!". It was funny as hell in a creepy way. (I get creeped out by herding humans because I don't understand them.)
Well Lar, I am in it for principle. The principle of trying to get the markets right rather than hold tens of thousands of robotic drones in the grip of my dogmatic beliefs. But anyway, I have digressed.
This post simply wants to note that the steepening yield curve, under pains of systemic stress and economic deceleration (it's there, if you look at non-laggards, like manufacturing), is swinging in favor of deflation as we have anticipated.
That does not mean inflation will not make a comeback, but it does mean that it's very likely going the other way first.
Gold ticked the new cycle high we have projected for it. It could now be vulnerable to any short-term relief from soothsaying government or Fed officials and/or the enthusiasm of its own buggish herd (and oh yes, there's that 2000 round number).
But gold has sent a price scout up there for higher levels and a steepening yield curve would generally be beneficial as the system comes under future stress.
Meanwhile, with the European Central Bank in rate-hike mode, I am a little mixed on Uncle Buck.
The chart is questionable at best and there is a case for a rally on market liquidity problems, but there is also a bear case for USD due to more hawkish global policy vs. US policy, which is set to flip away from its hawk routine in the coming months.
Put it this way, unlike previous deflationary episodes, I am no USD bull. Not yet, anyway. It is interesting at least, that gold has been getting a better liquidity bid than USD to this point.