Where the curve moved

On Friday the US Treasury's daily yield curve had the two-year at 4.34 per cent against 4.20 per cent, the ten-year at 4.59 per cent against 4.52 per cent and the 30-year at 5.21 per cent against 5.18 per cent. The 14 basis point move at the front is two to four times the 7 at the ten-year and the 3 at the 30-year. The gap between the two-year and the ten-year narrowed from 32 basis points to 25, and the move followed Warsh's Jackson Hole speech.[1]

In a yield curve, where the move piles up carries as much information as how big it is. The weight sitting at the two-year points to investors repricing the policy path of the next few meetings; a change in long-run inflation expectations would have shown more than 3 basis points at the 30-year. The one plausible alternative belongs in the account too: month-end index-matching demand for long-dated paper can hold the long end down artificially in a single session.[1]

Equities read the same news differently

In the same session the S&P 500 closed 0.25 per cent lower at 7,711.76 and the Nasdaq Composite 0.52 per cent lower at 26,402.42, while the Dow Jones finished almost flat at 53,559.99, down 9.45 points. The indexes tried to hold gains during the day and turned lower into the close.[2]

A 14 basis point shift at the front of the discount curve against a quarter-point slip in equities supports the reading that equity holders did not treat that shift as a threat to earnings. The bond market is pricing policy while the equity market is still pricing profit, and a gap like that closes when one side follows the other. Which side follows is not something this session's data settles.[1], [2]

The signal to watch

At the other end of the inflation input sits oil, and that side moved the opposite way: Brent ended the week down 5.5 per cent and WTI down 5.2 per cent, with Friday settlements of 89.18 dollars and 82.52 dollars a barrel. Extra crude through the Strait of Hormuz and the volume opened by US mine clearance work loosen one of the fastest channels into headline inflation.[3]

That is why the measurable threshold sits at the front. If the two-year yield stays at or above its Friday close of 4.34 per cent into the Fed's 16 September meeting, the gap between the two-year and the ten-year should stay at 25 basis points or below; if that gap widens again, Friday's move reads as one session's positioning. The level is technical; the reason is economic.[1]