Inversion Nears its Peak: Recession Incoming?

Rates mixed after morning data. Swap rates and Treasury yields swung back and forth before ending mixed across a flattening curve, sending the 2s10s inversion nearly 1bp off its widest point in decades. The 2-year yield rose 4bps to 4.90% while the 10-year yield stayed flat at 3.84%. Elsewhere, equities continued to rally, the S&P 500 closing at its highest level since April of 2022.

Today’s data somewhat cooler than expected. Today’s slate of closely watched data were largely in-line with expectations, but there were some notable figures that came in under-expectations. YoY Core PCE decelerated slightly compared to April, a positive sign given the Fed’s vocal concerns about core inflation running hot. More pronounced was flat consumer spending growth versus a 0.8% climb in April. Consumer spending has served as the economy’s main economic growth engine in this market, and the decline is viewed by some as a sign that economic growth is poised to slow. Interestingly, the recent end to government student-loan relief is set to further strain household budgets and impact spending. Looking ahead, former Goldman Sachs CEO Lloyd Blankfein pointed out that while conditions are worrisome, he questions if they are consistent with a hard landing, opining on rising payrolls and prior economic growth data. Still, other economists and bond markets are pricing in high recessionary odds.

Week ahead. Friday’s nonfarm payrolls and unemployment figures will headline a schedule that also features PMI and balance of trade data. FOMC minutes (Wednesday) will also be closely watched. The US bond market will close early on Monday and will be fully closed on Tuesday in observance of Independence Day.