Last week, for the first time since February 2008, the LIBOR curve inverted. The 3-month tenor has been on the move downward for some time. The 1-month rate has been gentler in its slope. Last Thursday, the two finally crossed. As unnatural as inversion in the UST curve or elsewhere, it’s another sign of imminent rate cuts.
I am somewhat reluctant to point out how it was on August 9, 2007, when this same thing happened for the first time last time around. It doesn’t mean we are repeating 2008, only that the market perceives substantial negative factors which are going to lead the Federal Reserve to begin reducing the interest it pays on its money alternatives soon.
Almost certainly at the end of next month.
The stock market view of all this is predictably one of near giddiness – more punchbowl! This is shared to a lesser extent by policymakers themselves. They are in public claiming that one or any rate cuts are nothing more than insurance for an otherwise strong economy to stay that way.
The problem with the two is that in many ways they rely on each other. It was, after all, record high share prices which encouraged Chairman Powell to be more hawkish in early 2018 after the uncertain start to his tenure. And then, a year later, it was the rebound in stocks following November and December’s plunge (the landmine) which kept the FOMC from outright panicking.