Understanding the 2/10 Yield Curve: What It Means for the Economy and Markets

America celebrated Independence Day with a bang in the stock market this week, as we witnessed record numbers yet again. This impressive performance coincided with a rally in the back end of the yield curve, adding more excitement to our holiday festivities.

Market Movements and Yield Curve Insights
One hot topic among stock market prognosticators is the rise in the 10-year yields. Some attribute this to last week’s debate debacle from President Biden and the market’s speculation on a potential Trump return to the White House. The market seems to be pricing in higher growth and lower taxes, driving inflation expectations higher. Regardless of the political underpinnings, what truly matters is that the market is signaling higher growth, which is excellent news for stocks.

Volatility Watch

Volatility is also making headlines as the skew moves higher and the cash is significantly below the front month. The volatility futures curve is exceptionally steep, potentially signaling a rise in volatility in the short term. With Friday’s jobs report looming, we should be ready for anything, as increased volatility could be on the horizon.

 

 

Vix Futures Curve

As we move closer to the election, it is expected that volatility to increase, hence why the October VIX Future are so high. Expect post-summer and especially the start of September for volatility to pick up drastically.

Potential Challenges: Oil and Interest Rates

One potential challenge to keep an eye on is oil prices, which are now at the higher end of the range. Higher oil prices, like a tax hike, can slow down economic growth. Similarly, rising interest rates could temper the economy. However, these factors could eventually lower oil prices and rates, aligning with the Fed’s aim for a soft landing.

Oil 1 Year

 

Market Movements and Yield Curve Insights

One hot topic among stock market prognosticators is the rise in the 10-year yields. Some attribute this to last week’s debate debacle from President Biden and the market’s speculation on a potential Trump return to the White House. The market seems to be pricing in higher growth and lower taxes, driving inflation expectations higher. Regardless of the political underpinnings, what truly matters is that the market is signaling higher growth, which is excellent news for stocks.

Understanding the Yield Curve

The yield curve, especially when negative, is a significant economic indicator. Here’s a quick breakdown of its implications:

• Negative Yield Curve: Historically predicts a recession. When short-term interest rates are lower than long-term rates, it reflects a pessimistic outlook on the short term, with expectations of falling interest rates.
• Positive Yield Curve Movement: This week, we saw a big upward move, causing some to worry about an impending recession. However, remember that a recession typically materializes only when the yield curve reverts to its normal shape.

Currently, the 2-year yield isn’t falling, which means the immediate concern isn’t a recession but higher growth and inflation expectations. This is why the market continues to show robust signs of growth.

10 Year Yields

Today, yields are up and the 10 year is up more than the 2 year. Trend line is approaching the higher end of its range. This is not necessarily great for gross stocks, but it is not an indication that the economy is collapsing.

The Crucial Jobs Report

All of this depends on the economy meeting these growth expectations, making Friday’s jobs report crucial. A strong jobs report could confirm the market’s optimism, while a weak report could prompt a reassessment.

Closing Thoughts

As we celebrate the 4th of July, let’s toast to the impressive market gains and remain vigilant about the underlying economic indicators. Keep an eye on oil prices, interest rates, and the jobs report, but for now, enjoy the festivities and the promising market trends.

Happy Independence Day, and here’s to continued success in navigating these exciting times!

JP Morgan–stock of the week

Earnings for JPM 7/12/2024:

• July 12, 2024 $205 call has almost 14K open interest. No other strike is above 3K and most are below 1k.
• Calls outpace trading puts nearly 2 to 1, making this strike a massive deflection point where the stock is either going to crash through to upside or stay away to downside.
• Implied move for earnings already projected big move of 3%.
• Historically only moves 2% after earnings.
• Expect some volatility.

Traders see the trend line breaking out to new all-time highs over the past year. Trend line of JPM is almost identical to Amazon over the past year.

 

Important Disclaimer: This article is for informational purposes only and should not be considered financial advice. Always consult with a qualified financial professional before making any investment decisions.