With Jerome Powell insisting that the Fed is done with rate cuts (for now, at least), bonds are ready to blast higher as yields sink. These moves will be abetted by what McElligott fears will be a triggered by a sharp pullback in economic data (something we hinted at last week when we said that that key catalyst for a global recovery, China, is nowhere to be seen this time around), followed by another, even more acute curve-flattening.

As McElligott explains (and as we have repeatedly harped on), while the flat curve is bad, it is the subsequent re-steepening that kills and is the precursor to a sharp market pullback. And at this point, trading activity starts to taper off. Typically, a flat curve is associated with slow growth, low inflation, or what McElligott describes as a “muddle-through of the last umpteen years of what it feels like in a post-crisis period, which is this 2%-ish, 1-1/2% to 2% GDP growth, sub-2% core CPI, which has grown this very crowded and of everything duration trade over the last few years.”



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