You better hope interest rates didn’t just peak for the cycle with the 10-year failing at 3.05%. So says Ari Wald (technician at OpCo), whose chart this weekend looks at 10-year treasury yield breakdowns as a leading (or coincident) indicator for major turning points in the S&P 500 / economy.
Looking back at the last economic cycle, the 10-year US Treasury yield peaked coincidentally with an inversion in the yield curve in 2006. However, it was a definitive breakdown in rates that occurred while the equity market topped in 2000 and 2007—we’re still missing this breakdown, in our view. In other words, we view the moderation in the 10-year yield as a warning (that could last months) but we don’t yet see the sharp turn lower that typically marks the end of the cycle.
And his chart – S&P 500 index price is the left scale, bond yields is the right…
If you were worried about rates going too high, be careful what you wish for. A definitive breakdown in yields is not the best case scenario here. Flattening before a resumption higher would actually be preferable to prolong the cycle.
Speaking of cycles, the economic team at Bank of America says the risk of recession in the next six months is probably being overstated on Wall Street and in the media. They’ve introduced a new big data model that shows less than a 10% chance that the US economy falls into recession in the first half of 2019. Here’s BofA Merrill’s Ethan Harris & Co