imo, the credit markets won't really like 1/4 point, unless it's accompanied by some VERY tough language that indicates there's more to come. i've given up on the classic equities/interest rates relationship though. apparently, ever since the '98 crisis, the stock market is more afraid of signs of a weakening economy and deflation as opposed to inflation and an overheating economy. thus stocks and bonds have remained decoupled, and the extraordinary strength in the economic data serves only to scare the bond market. there's a sort of perverse logic to this, as the global economy is seen as being dependent on the U.S. economy's hunger for imports, and the U.S. economy in turn depends on the stock market and credit bubble instigated by the Fed.
now, the curve inversion is a danger sign of the first order, especially as corporates haven't budged...i.e. whenever the 30-yr. bond rallies, long dated corporate paper just sits there, so the spreads(indicating increasing credit risk) are widening.
it's this combination that in the past has usually been the most reliable indicator of a coming recession there is. it beats high-paid economists and WS strategists hands down every time.
now, if the stock market is drawing it's strength from strong economic data, it follows that the curve inversion can't be good for it. remember: an inverted curve means that the markets assess CURRENT economic conditions as being brighter than FUTURE conditions. and the stock market is a discounting mechanism that has so far not yet discounted that fact. |
