Why is any of the above important? All of the above complicates the Fed’s decision-making. Not to mention, the dynamics of the deceleration will also affect yields - particularly longer duration. For the moment, markets believe 2023 is the year of the hike. Expectations for 2021 and 2022 have receded. Maybe it was all the “talking about talking about taper” talk that moved expectations for a hike higher. Oddly, taper talk (and eventual tapering) would have the effect of pushing down growth and inflation expectations. And therefore yields.
And that is the odd part of all of the above. GDP is going to decelerate with inflation (probably) following suit to even greater extent. All of this while the Fed is talking about talking about tapering their asset purchases. Maybe the decline in the 10-year yield is more signal than noise. With seemingly everything looking peakish, it is worth contemplating what the otherside might look like.
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Avalon Advisors - Chief Economist