Morning Notes — Yield Curve

The policy statement language around inflation will likely change from the last meeting which described inflation as “largely reflecting transitory factors.” Powell is expected to push back on the market’s pricing of interest rates, but similar efforts from Lagarde last week didn’t seem to have an impact on the front end of the yield curve.  The amount of optionality in the Fed’s message should be the wild card for markets today.  But, the June Fed meeting with its more hawkish dot plot surprised markets.  As a result participants have less conviction coming into today’s meeting, meaning bond markets may be largely de-risked.

Yield curve: Last week, 2-year yields faded on the approach to March ’20 highs at ~0.55%. Levels below ~0.44% would confirm the cycle high at the short-end and take pressure off recent curve flattening.  The shape of the yield curve informs equity sector preference and curve steepening from here would likely add momentum to any pro-cyclical/value rotation.  The S&P 500 Value Index broke out of a multi-month range two weeks ago, with the recent curve flattening causing some retracement. Now at ~1513, the SVX looks ready to advance further and we keep a positive bias at levels above ~1470.