Do Not Apply Precedence for the Unprecedented 

1.Record Inversion. The 2/10-year yield curve remains inverted after 222 consecutive trading days, breaking the streak set during the dotcom bubble in 2000, and now the longest such inversion since 1980. The pandemic shut down the economy, which government stimulus steadied in 2020 but overstayed its welcome amid 40-year-high inflation in 2021 that the Fed thought “transitory.” Then, with the Fed behind the eight-ball, historic rate hikes, which began in March 2022, took interest rates from 0.5% to 5.5% within 17 months. 

All the while, “recession” headlines have pushed to apply precedence to today’s environment. An inverted 2/10-year yield curve has predicted every recession since 1955, with only one false signal. Given the extreme Covid event that put a complete stop to global economic activity, followed by supply chain disruptions, record inflation, the Russia/Ukraine war, economic turmoil in China and more obstacles to stabilizing U.S. economic activity, it is without question that we have just gone through an unprecedented period. 

While the yield curve remains inverted there are factors that make this environment “different this time.” For example, the continuation of record fiscal stimulus, the Fed’s actions in running off the balance sheet and underlying economic momentum, from both the U.S. labor market holding strong with higher wages and a recovery in manufacturing with the S&P Global manufacturing new orders comfortably above 50 (a leading economic indicator). If you simply stayed on the sidelines because of the inverted yield curve, you would have missed significant opportunities. 

Chart 1: Stock Markets Ignoring Sustained Inversion, Moving Higher with Lower Inflation and Better Profits¹ 

The government deficit is likely keeping a lid on longer-term interest rates. The deficit will certainly impact future generations, and there is no good near-term resolution. Fiscal spending is requiring the Treasury to increase borrowing, while credit spreads remain historically tight with no signs of stress and M2 money supply (a measure for total cash on hand in the economy) remains $5 trillion higher than pre-pandemic. 

Chart 2: Money Supply Above Pre-Pandemic Trend, Expected to Stay High in 2024² 

2. Jamie Dimon Seeing an Economic Boom. This is something we have been highlighting for over a year. JP Morgan CEO, Jamie Dimon, is urging the Fed to stay patient on its inflation fight. February CPI moderated to 0.3% m/m, from a 0.4% pace in January, and remains up 3.2% y/y, while core CPI (excl. food and energy) is up +3.8% y/y. Housing prices are keeping core CPI elevated; when housing is excluded from Core CPI, February reported a sharp slowdown in pace (+0.47% m/m) compared to January (+0.85% m/m). While this is considerable progress, inflation remains above the Fed’s 2% target, and this “last-mile inflation” may be the most difficult to accomplish. 

Housing inflation and wage growth are stickier than many other inflation components. Housing demand and strong employment are important for the economy, so it is not all bad news. Dimon stated that the Fed, “can always cut [rates] quickly and dramatically. Their credibility is a little bit at stake here. I would even wait past June and let it all sort it out.” We do not expect the Fed to change its target rate during this week’s FOMC meeting. 

3. U.S. Banks Are Seeing an Increase in Loan Demand. Loan growth over the last eight weeks is up 6.2% y/y vs. 2% in 2023. In addition, one Fed survey showed a smaller proportion of banks tightening lending standards in the fourth quarter, compared to the prior quarter. We are likely past peak commercial tightening for banks. While lending standards are elevated, commercial loan growth can support economic activity. According to the survey, consumer lending continues to tighten. 

In March, value sectors have outperformed growth. This is a shift from January-February when growth sectors outperformed. We are paying attention to technical indicators that highlight shifting momentum that supports value-based sectors, like energy, financials, industrials and materials, amid potentially overbought scenarios for growth sectors, like technology and consumer discretionary. Small caps continue to underperform large caps in 2024 with the Russell 2000 recording its worst week last week since the opening of 2024. 

4. Record Dividend Payments. Global corporate dividends paid out $1.66 trillion in 2023.³ Worldwide, 86% of listed companies either increased or maintained dividends last year. Strong cash flows drove companies to increase shareholder returns broadly in the form of both dividends and repurchases. The banking sector represented half the growth in dividends last year. We expect a similar dividend growth trend again this year as revenues and margins remain supportive across sectors like energy, healthcare and consumer goods. 

5. Fixed Income. U.S. Treasuries tumbled throughout the week, following stronger-than-expected February CPI and PPI reports. The U.S. 2-, 10- and 30-year Treasury yields rose by 22, 23 and 19 bps, respectively. Fed Chairman Powell and the voting committee are expected to keep the fed funds rate at current levels during Wednesday’s FOMC meeting as aforementioned inflation reports and job markets remain strong. 

High yield spreads remain tight, reaching a new 52-week low last Friday, at +350 bps. The muni yield curve rose 3-4 bps on the short end and fell 1-3 bps on the long end. Munis are still lagging as Treasuries move higher and put further pressure on already rich muni ratios. 

6. The Week Ahead. 

Earnings – Wednesday: GIS, MU; Thursday: DRI, NKE, FDX. 

Economics – Monday: NAHM Housing Index (March); Tuesday: Housing Starts and Building Permits (February); Wednesday: March FOMC Meeting; Thursday: Philadelphia Fed Index (March), PMI Composite (March). 

Stephanie Link’s TV Schedule 

Return for Selected Indices⁴ 

Sources

1. FactSet (chart). As of March 17, 2024.
2. FactSet (chart). As of March 17, 2024.
3. Reuters. As of March 13, 2024.
4. Bloomberg. As of March 18, 2024.

Disclosure 

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