Markets are at a critical point: Tariffs, or simply the threat of them, are creating nervousness in the equity markets, which in conjunction with high valuations, have pushed indexes below the 200 moving average (se below for Nasdaq), a simple yet powerful technical analysis indicator that tells us we may be entering a new regime. That is creating some downward pressure in bond yields, but this is being compensated (and more) by the upward pressure caused by fiscal spending. The U.S. does not have government spending under control, and now Germany, UK and China are also stimulating. Japan has seen its 10 year bond going from a 0.25% yield to the current 1.5% in less than 3 years. Inflation is coming back, and bonds are starting to reflect that. Due to both factors, companies in the US have started to announce layoffs, which will affect unemployment and will put the Fed in a difficult position: do they cut rates to support the labour market or do they stay put, or hike, to control inflation? The odds of a rate cut in March have increased, but they are still not high enough to guarantee a Fed’s decision to cut.
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