The tiny bump higher in wages has the inflation proponents cheering and throwing confetti announcing that the genius central bankers have finally succeeded in creating inflation that will accelerate higher here forward. With the hype around wages and proposed inflation, the Fed will continue on its rate hike path, hence the 2-year yield rises. The rate hike this month at the conclusion of the two-day FOMC policy meeting on Wednesday, 9/26/18, is a done-deal and has been considered a guaranteed move for the last couple months. A December hike has been a bit questionable as Chairman Powell talks like a two-handed economist, but after the higher wage numbers, investors are positive that the December hike will occur. Thus, the 2-year yield pops to 2.71%.
Now, as Paul Harvey would lament in his commentaries years ago, it is time for the other side of the story. The dirty little secret that the Federal Reserve will not tell you, however, is that wages typically need to be growing at a pace of +4.0% to +4.5% annually to create sustainable inflation. The year-on-year number bumps higher to +2.9% which is not even at the +3.0% level as yet. In addition, other bumps higher in the jobs report data has only led to disappointment in the following month. The 10/5/18 jobs report will be critically-important to see if wages follow through to the upside, or, if they retreat again. Humorously, the US Monthly Jobs Report is now renamed the US Monthly Wages Report.
Placing all the above mumbo-jumbo aside, let's allow the chart to tell us the path forward.The red lines show the higher highs in yield occurring (lower bond prices, higher yields) but the chart indicators are universally negatively diverged. This behavior hints that the long six-year run higher in yields is petering out rather than moving higher. The yield has also violated the upper standard deviation band at 2.70% so the middle band at 2.57% is on the table and also the lower band at 2.44%.The RSI and stochastics are also overbot preferring to see a pullback in yield.
If you bring up the UST2Y monthly chart, the indicators are also in negative divergence with the higher high in price except for the MACD line that has a sliver of life left in it. Thus, the expectation would actually be for the 2-year yield to roll over lower in the weekly time frame but in some sideways action and then on the monthly basis come back up again to match the current high at 2.71% or even a bit higher. At that time, the MACD on the monthly chart will likely be in neggie d beginning the down move for the 2-year yield for many months even perhaps years ahead.
A drop in yields would occur with an economy that stalls and slips into recession. The trading positions that are short Treasuries are at all time record highs (traders universally expect lower note and bond prices and higher yields; they all expect inflation). If the charts play out and yields actually slip lower, the shorts will panic and begin buying notes and bonds like madmen sending yields cascading lower. At the same time, if the economy is slipping into recession, and stocks are selling off, investors will be panicking and buying Treasuries for protection sending yields further lower. Keystone considers this the most likely outcome as the weeks and months play out.
The standard deviation bands are the tightest in over 10 years (purple arrows). There is a huge and massive move coming with the 2-year yield in the weekly time frame. Tight bands do not predict direction they only tell you that the magnitude of the move will be big-time. When yields were at the lows in 2013 the tight bands shot the 2-year higher and it has not looked back six years later. There were also tight standard deviation bands in 2017 which also resulted in a wild up move for the 2-year yield. The inflation proponents are unwavering in their belief that the breakout move for the 2-year yield will be a rocket launch higher in yield for the weeks ahead. Perhaps they may be right but the chart is in conflict with that outcome.
The Fed may come out and proclaim that the December hike is guaranteed and not only that but the rate hikes will speed-up. This chatter would send the yield wildly higher. If Chairman Powell talks down the December hike, or the economic data weakens, or the 10/5/18 jobs report shows weaker wages, that will likely create the big flush lower in the 2-year yield.
The monthly chart middle band is at 1.90% and rising. The projection will be adjusted as charts adjust but currently the forecast would be for the 2-year yield to linger at this 2.70%-2.72% range for few days or week or so, then roll over to the downside for a week of two, then come back up to the same highs say about a month out, say later this month or early October (perhaps timed with the 9/26/18 rate hike), then likely collapse lower to the 2.00%-2.50% range into the end of the year. This will likely occur in concert with the data showing that the recession is likely approaching far faster than anyone currently realizes. The wage data would be expected to stall going forward.
Note the tight standard deviation bands on the monthly charts for the TBT and TLT ETF's. There is a massive directional move coming for yields that will play out over the coming months. Are you an inflation proponent expecting far higher yields or do you think the wage and economic data will weaken leading to far lower yields as the year plays out? The boat is fully loaded on the inflation and higher yield side. Keystone is lonely sitting by himself on a deck chair on the other side of the boat. This information is for educational and entertainment purposes only. Do not invest based on anything you read or view here. Consult your financial advisor before making any investment decision.
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