CME Fedwatch has 48% Chance of at Least Four Hikes in 2018. Inversion When?

Deutsche Bank research suggests the yield curve will invert in 2019. I suggest sooner if the Fed hikes 4 times.

The inversion chart came in a Tweet. I do not have a link to the analysis.

If the Fed gets in 4 hikes this year, I would expect the curver to invert sooner. CME Fedwatch shows a nearly 50% chance of at least four hikes.

It's also possible the economy falls to pieces and the next move is a cut. Under that scenario, inversion may be a long time coming.

Mike "Mish" Shedlock

And as in prior cycles, the Fed will tighten until "something breaks". Whether that happens four (+100 bps) rate increases from now or not is the question. I happen to believe that the stock market - and by extension, the real economy - will force them to stop - and then reverse course - after another one or two.

The simple act of the Fed "raising" rates back to historical norms does not force an inversion. The Fed can raise short term rates, but if long term rates also rise, there is no inversion. In any case, an inversion does not cause a recession, but, as you said, historically it has been a predictor of them.

the feds have tools in their tool kits that can effect the yield curve - "operation twist "

Yes, they can artificially affect long term interest rates, too, but it is significantly more difficult for them. Lowering long term rates requires them to buy a large quantity of long bonds, and inflate their balance sheet tremendously. They are trying to do the opposite, normalize their balance sheet somewhat.

Blacklisted; the pension crisis is not something that will happen soon. It is a long-term problem that will play out over many decades. While raising rates can help the funding status of many pension funds, it does so over decades, and does not affect the short term. The obvious solution to the pension crisis will be to reduce pension benefits a bit at a time, slowly, and methodically so pensioners won’t scream too loud. This will be done with a variety of methods; increasing age eligibility, reducing inflation protection, tax clawbacks, etc etc.


All inversions are forced by fed actions, since they control the short end of the curve. They can always prevent any inversion if they want to, simply by lowering rates. Or create an inversion by raising rates - which is what we are currently seeing. The only reason an inversion is a predictor of recession is because it implies the fed has raised short-term rates significantly, and higher short-term rates adversely affect consumers and businesses.

Given that as rates are raised, the PE ratio of stocks will fall, I think that raising rates will accelerate the pension crisis, not post-pone it. It would help a pension fund that was solely invested in short term interest instruments, but hurt one that was invested in stocks, and most likely hurt one that was invested in long term bonds.

"For progressives the ends justify the means." Really? For which political block does that not apply these day?

I believe the Fed, under Powell, won't back off the pace. There are just too many financial/economic claxtons blaring to ignore any longer if they're to preserve even a modicum of political independence when it all hits the wall next time.. They'll go for four, and not so much because the bank casinos and business interests are obviously now addicted to easy money, but increasingly because so many now need a recession's license for a kitchen sink quarter to close the yawning gap between GAAP earnings and fantasy earnings.

I cannot believe the CME Fed watch says there is a 50% chance for 4 more hikes this year. When members of the Fed say things like this they are trying to get the market ready for just 1 more hike and then we’ll see what happens. We need to remember that they continue to allow treasury and mortgage backed securities to mature each week which is slowly draining liquidity from the 4 trillion that was acquired via QE 1,2 and 3. Personally I happen to believe the Fed is acting responsibly for the first time in a very long time, yet sadly is way too late. All these markets have so much leverage that way before we get to 3, 4 rate hikes a worldwide financial crisis will blow everything up.Thats just my humble opinion.

The main reason the Fed wants to hike as fast as they can and reduce the balance sheet, is to have some dry powder ammo for the next recession

That’s right snow dog. The best way to solve the long term pension crisis is to begin chipping away at it, bit by bit over time, so people hardly notice. It’s been going on for a while now and many people don’t even realize it. And it will continue because it has to, as so many funds in the US have been so poorly run.

Mish you are right so I should have made this distinction between the opinions made on the CME and the Fed. Nevertheless ever so often a member of the the Fed will make a remark to prepare or even warn the markets if they are not correctly factoring in a rate hike or rate cut.

They have to get that bond auction off the ground screw the yield curve full speed ahead

Hey Mish I was thinking about what could make you b wrong about the direction of interest rates. It certainly is not going to a pickup in growth for a great number of reasons mostly having to do with excessive debt at every level with the government,

to include the government. Corporate and consumer I think setting records, so it would

have to be excessive supply. Aren’t we selling record amounts of debt at every auction? Watching all this rates have started moving up but if they keep moving up it’s going to really hurt housing and leveraged debtors which will slow growth even more. Anyway to try to make my point, if this disinflation continues, it seems like the Fed seeing an opportunity here would start selling excessive amounts of treasury and mortgage backed securities adding to supply that at some point cause rates to move up again causing the Fed to back off and wait and watch rates begin to slide again thus another opportunity to sell more of this huge amount debt once again. I don’t know if I’m making any since here, so I wish I hadn’t started making these remarks in the first place.