With two comments this morning that seemingly fly in the face of all common-knowledge, Fed's Dudley offered a hawkish tone that sparked selling pressure in stocks and bonds even as USDJPY spikes.
Dudley proclaimed first that an inverting yield curve is not a problem...
FED'S DUDLEY: FLATTENING YIELD CURVE NOT A NEGATIVE SIGNAL FOR U.S. ECONOMY
Which is odd because every time the curve has flattened this dramatically, the US economy has gone into recession..
As a remidner, an inverted yield curve, which has correctly predicted the last seven recessions going back to the late 1960’s, occurs when short-term interest rates yield more than longer-term rates. Why is an inverted yield curve so crucial in determining the direction of markets and the economy? Because when bank assets (longer-duration loans) generate less income than bank liabilities (short-term deposits), the incentive to make new loans dries up along with the money supply. And when asset bubbles are starved of that monetary fuel they burst. The severity of the recession depends on the intensity of the asset bubbles in existence prior to the inversion.
And then proclaimed that easing is now a bad thing...
FED'S DUDLEY: HALTING TIGHTENING CYCLE NOW WOULD IMPERIL ECONOMY
The response is clear... Bonds down, Stocks down, Dollar up
So flattening is bullish, tightening is bullish, and balance sheet unwinds are bullish?
“They desperately want this to be an easy, smooth, paint-drying type of process, but there’s no chance,” said Peter Boockvar, chief market analyst at The Lindsey Group.
“The whole purpose of quantitative easing was to inflame the markets higher. Why shouldn’t the reverse happen when we do quantitative tightening?”