After exploding out of the starting gate a few weeks ago, the paper markets are getting a big smack in the face this week.
Stocks slumped for a third straight session yesterday, as the S&P declined by 0.8%, and it’s now down 2.5% for the week – on track for the first negative week of the year.
On the other hand, Treasuries have done well this week. Remember that bond prices move in the opposite direction of their yields (thus, falling yields mean rising prices).
The benchmark 10-year yield, which started this holiday-shortened week at just shy of 3.5%, took a nosedive on Wednesday and is now poised to finish the week about 10 basis points lower – at 3.4%.
Notably, the 10-year vs. the 2-year yield curve inversion (3.4% vs. 4.2%) continue to signal that investors at best see the Fed reversing course over the coming year and reducing rates. At worst, they see a coming recession.
The 10-year vs. 90-day yield inversion is even greater.
In the precious metals market, gold is up 0.7% for the week and is up 5.6% since January 1st. Silver is slightly up for the week (0.2%) but is slightly down since the start of the year (0.3%).
By Dave Allen for Discount Gold & Silver
After exploding out of the starting gate a few weeks ago, the paper markets are getting a big smack in the face this week.
Stocks slumped for a third straight session yesterday, as the S&P declined by 0.8%, and it’s now down 2.5% for the week – on track for the first negative week of the year.
On the other hand, Treasuries have done well this week. Remember that bond prices move in the opposite direction of their yields (thus, falling yields mean rising prices).
The benchmark 10-year yield, which started this holiday-shortened week at just shy of 3.5%, took a nosedive on Wednesday and is now poised to finish the week about 10 basis points lower – at 3.4%.
Notably, the 10-year vs. the 2-year yield curve inversion (3.4% vs. 4.2%) continue to signal that investors at best see the Fed reversing course over the coming year and reducing rates. At worst, they see a coming recession.
The 10-year vs. 90-day yield inversion is even greater.
In the precious metals market, gold is up 0.7% for the week and is up 5.6% since January 1st. Silver is slightly up for the week (0.2%) but is slightly down since the start of the year (0.3%).
Flashback (in honor of the late, great David Crosby)
One week ago, the S&P was up 4.2%, raising hopes of a multi-market surge and a reversal of last year's 19% fall. Now, after the last few days, it's up just 1.6% this year.
Here's what analysts like Matt Phillips say has taken the air out of investors' tires:
First, they had hoped that slowing inflation would make the Fed more likely to cut interest rates.
But recent soundbytes from Fed policymakers suggest that they plan to keep tightening until the Fed funds rate is above 5% (and, possibly, then some). It’s currently in a range of 4.25-4.5%.
And perhaps more importantly in the long run, raising the federal government’s $31.4 trillion debt ceiling looks almost certain to be a drawn- out political wrestling match that could tank markets.
The S&P 500 fell 15% during the 2011 debt-ceiling debacle, when the nation’s sterling AAA credit rating took a hit.
And last but not least, early 4th-quarter earnings coming out of Wall Street have looked a tad soft.
Of course, as Phillips points out, none of that makes it certain that stocks will have yet another awful year.
He writes, “We had a couple of good weeks, and then we had a bad week. That's how markets work.”
How It All Plays Out
Hans Nichols and Zachary Basu suggest five potential scenarios for how one of the most consequential political fights of the Biden presidency could end:
Freedom Caucus renegades haven’t said if they’d use the "motion to vacate" to oust McCarthy if he fails to extract significant spending cuts in exchange for GOP votes to raise the ceiling.
But Nichols and Basu say “it's hard to see what they would use it for, if not this.”
That position forced Senate Minority Leader Mitch McConnell to give in during the last showdown in 2021, and Biden is determined to run the same playbook.
Democratic Sen. Joe Manchin reportedly has signaled he may reintroduce a bipartisan bill to create a "rescue committee" for every government trust fund endangered by a debt default.
They say give it a face value of $1 trillion, and deposit it at the Federal Reserve — circumventing Congress and the borrowing limit. Yellen in the past has dismissed the loophole as a "gimmick."
As of yesterday, the Treasury Department began taking “extraordinary measures” to ward off a debt default while Congress and the White House debate our fate. To see what measures are being considered, click here.
But wait…there’s more. Next Friday, the government will release the Fed’s preferred inflation measure – the Personal Consumption Expenditures index.
Given the markets’ already ramped up anxiety over how the Fed is fighting prices, the stormy political atmosphere surrounding the fight over the debt ceiling — which only just got started — will surely cast a cloud over markets for months to come.
Just how dark that cloud becomes…well, we’ll just have to wait and see. In the meantime, strap yourself in and hold onto your hat!