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The yield on the 2-year Treasury briefly exceeded the 10-year on Tuesday for the first time since 2019, in a warning sign that coming Fed rate hikes may trigger a recession. The inversion happened at a level of about 2.39%, but only lasted several minutes before things returned to a 5 basis point spread. A short-lived inversion also occurred in the summer of 2019 amid the trade war with China, and while that was followed by the COVID downturn of 2020, the last persistent inversion of the Treasury curve occurred in 2006-2007.
What it means: Yield curves typically slope upward, so when short-term yields return more than longer-dated ones, it suggests there is reason to worry about the long-term outlook. It can also signal that the high levels of short-term yields are unlikely to be sustained as economic growth slows, which can have an impact on a range of asset prices. "Historically, a recession has not happened without an inversion," said Ben Emons, global macro strategist with Medley Global Advisors. "So likely, it will be a predictor of a future recession. Timing, however, is unknown. It could take up to two years."
A series of inversions besides the closely-watched 2s/10s proxy have recently occurred as traders price in more and more rate hikes. 20-year yields topped 30-year yields last October, while the gap between 5-year and 30-year yields turned upside down on Monday. As the Fed embarks on a cycle of quantitative tightening, there are fears that it will reduce consumer spending and business activity as the central bank battles the highest inflation rates in a generation.
False alarm? "There's reason to believe that this time around, yield curve inversion may not be as good of an indicator as it has been in the past, particularly given the enormous amount of quantitative easing undertaken by global central banks," said Erin Browne, a fund manager at PIMCO. Moreover, Fed Chair Jerome Powell announced last week that he's paying more attention to the first 18 months of the yield curve rather than anything that goes on afterwards. The inversion could also be more of a blip than a lasting trend, and in fact, the curve steepened overnight with the 2-year and 10-year yields hitting 2.31% and 2.40%, respectively. (9 comments)
U.S. stock markets have mostly shrugged off the latest news out of Ukraine over the past couple of weeks, suggesting investors are putting headlines related to the conflict on the back burner (for now). The three major indices have even fully recovered all of the losses they experienced since the beginning of the invasion, with the S&P 500 exiting correction territory on Tuesday. Global investors have also taken some comfort over the prospects of a potential peace deal as the two sides met for negotiations in Istanbul.
On the ground: Russia pledged to reduce military activity in Kyiv and Chernihiv as it refocuses its campaign on the eastern Donbas region, though President Volodymyr Zelenskyy responded that "Ukrainians are not naive people." Remember that Russia announced it would return its troops back to base - following military exercises in neighboring Belarus - just before launching an all-out invasion of the country on Feb. 24. In terms of a potential settlement, Ukraine said it would agree not to join a military alliance or host foreign troops, but would rather demand security guarantees similar to NATO's collective defense clause known as "Article 5." In turn, Moscow would not oppose Ukraine joining the EU, though the fate of the Donbas would be determined by Putin and Zelenskyy, who would meet for the initialing of a treaty once negotiations were complete.
"This has been a nice ride," noted Stephanie Lang, chief investment officer at Homrich Berg. "The market's now up almost 10% in the last 10 days, so we've had a pretty incredible rally in a very short time, but I wouldn't get too comfortable for the rest of this year, because I think we're going to continue to see a lot of volatility." S&P 500 futures are trending down this morning, inching 0.4% lower ahead of the final release of U.S. Q4 GDP data and the ADP National Employment Report.
Energy on watch: Germany has declared an "early warning" on natural gas supplies, calling on consumers and companies to limit consumption given risks of a full supply disruption from Russia. The emergency measure is the first of three stages, but does not yet mean state intervention is needed to ration gas supplies. Dutch TTF natural gas futures, a European benchmark, still soared on the news, climbing as much as 14% to €123.5 a megawatt-hour. (5 comments)
Activist investor Carl Icahn has found his next target as he pushes for more humane treatment of pigs. The billionaire just submitted an intent to nominate two director candidates - Alexis C. Fox and Margarita Paláu-Hernández - to Kroger's (KR) board, who will "take our concerns about deplorable animal suffering seriously and add proper oversight." While the supermarket chain doesn't produce pigs, they back the "terrible practices taking place at industrialized factory farms that are supported by Kroger’s patronage."
Backdrop: The potential proxy contest at Kroger comes just a month after Icahn nominated two board members at McDonald's (MCD) amid a dispute with the company over its treatment of pigs. The issue is the same. Icahn wants McDonald's to stop using pork that is sourced from gestation crates, something that he first brought up with the fast-food giant around 2012.
"Kroger’s inaction towards creating meaningful animal welfare policies and verification methods is totally out of step with consumer desire and current legislation," Icahn wrote in a letter to Kroger CEO Rodney McMullen, which also discussed concerns over the disparity between his compensation package ($22.4M in 2020) and the supermarket chain's median worker ($24,617).
The response: "While Kroger is not directly involved in raising or the processing of any animals, we are committed to helping protect the welfare of animals in our supply chain," the company replied in a statement. "Kroger has an established Responsible Sourcing Framework to clearly define our policies, requirements and practices, including our Animal Welfare Policy, which articulates our expectation that all suppliers will have transitioned away from gestation crates by 2025." (23 comments)
Shares of Robinhood (HOOD) spiked 24% on Tuesday as the company increased its extended trading session by four hours. Two hours were added to each side of its prior trading window, meaning customers will now be able to trade from 7:00 a.m. to 8:00 p.m. ET. Popular brokerages like TD Ameritrade (SCHW) already offer those hours, while other trading apps like Webull even feature a trading session that starts at 4 a.m. ET.
Bigger picture: The effort is part of Robinhood's vision to enable 24/7 investing, and will likely mean more trading volumes (and profits) for the company. It can also be advantageous to traders that employ momentum strategies or catalyst-driven trading. For example, outsized price movements during earnings season are typically seen before the opening bell or right after the close, when companies disclose their quarterly results.
"Our customers often tell us they're working or preoccupied during regular market hours, limiting their ability to invest on their own schedule or evaluate and react to important market news," Robinhood wrote in a blog post. "In fact, we’ve seen a community of Robinhood early birds and night owls who log in exclusively outside of regular market hours."
What happened until now? Crypto trades around the clock, and futures almost do as well, but when it comes to the U.S. stock market, many have felt that better price discovery happens when most Americans are awake. A shift to 24/7 trading would also make the lives of market makers, exchanges, brokers and financial professionals more complicated, and in many ways, they dictate the resources in the current trading environment. However, Robinhood has disrupted the market once before with commission-free trading, and it may now have the opportunity to do so again. (16 comments)
In Asia, Japan -0.8%. Hong Kong +1.4%. China +2%. India +1.2%.
In Europe, at midday, London flat. Paris -0.9%. Frankfurt -1.3%.
Futures at 6:20, Dow -0.3%. S&P -0.4%. Nasdaq -0.4%. Crude +2.2% to $106.54. Gold +0.5% to $1922.50. Bitcoin -0.8% to $47,290.
Ten-year Treasury Yield unchanged at 2.40%
Today's Economic Calendar
7:00 MBA Mortgage Applications
8:15 ADP Jobs Report
8:30 GDP Q4
8:30 Corporate profits
9:15 Fed's Barkin Speech
10:00 State Street Investor Confidence Index
10:30 EIA Petroleum Inventories
11:00 Survey of Business Uncertainty
1:00 PM Fed's George: Economic and Monetary Policy Output