The Fed 'is in no position to disinvert the curve', says Ironsides Macroeconomics’ Barry Knapp

Let’s talk more about the markets. Joining us right now is Barry Knapp, matching Partner and Director of Research at Ironsides Macroeconomics. Barry, great to have you with us. Good morning, Melissa. I’m not going to ask about your backdrop today as you normally are asked. I’m going to ask you about Powell and whether that changes your outlook on the markets. You know what he said yesterday seems to just sort of match up with what the markets and economists have started pricing in and that is fewer rate hikes, rate cuts, excuse me, this year. Yeah, I he didn’t change anything specifically yesterday. It’s been very apparent since we got the March data flow that the Fed was not going to be in a position to start the easing process in June. Between ISM turning positive for the first time since Sep 22 payrolls and then CPI. The path for the Fed to be able to cut to 4%. The level that I think would painlessly disinvert the curve and remove all this pressure on the banking system, allowing them to finance small businesses, construction, real estate developers and ultimately the federal government, which is the real issue here, which is being able to place all this treasury supply. There’s just no path for them to get there right now And and the data really sealed that. So we’re in a we’re a bit of a sticky wicket. The only question is does the pressure on the treasury market, real rates in particular become acute enough that we have say a retest of 5% like we had last October 10 year. Real rates moving towards 2 1/2 percent. The TIPS yield that is and that caused a full on risk off that drags not just small caps and banks and interest rate sensitive parts of the stock market down, but you know the whole market like we fight the 10% or we had last fall. So how do you assess that risk reward in terms of getting to that 5% threshold which may be a real deal breaker for an equity rally. I mean you have not only the Fed now saying that you know we it’s going to take much longer for us to get to rate cutting at this point and then you have the issue of treasury issuance and the terrible auctions that we’ve seen. So we have all these forces pushing yields higher. Do you see that that risk is actually a greater risk today than it was? I don’t know, two months ago, one month ago, one week ago, well, it it’s definitely greater for the second quarter than it was for the first. If you think about the actions of the Treasury over the last couple of years, it’s had a bigger bearing on the direction of the bond market then has the actions of the Fed in some ways. When Janet Yellen was draining the Treasury general account in early 2021, that offset the big increase in supply related to the American recovery plan. Last year when she announced she had an additional 500 billion for sale in the second part of the year. That’s what kicked off that big move higher in rates. They then moved to increase bill issuance, which is ending right about now. And the reason they had to slow all the bills that they were selling was because it was draining the RRP program and actually causing the Fed to slow QT. So the way this whole thing is interacting, but my point is there was always going to be far more coupons for sale in the second quarter then bills. They were going to reduce bills and that was going to need to be absorbed in order to absorb it. You need the banking system and the banking system can only buy, you know five year treasuries at 4 1/2 percent or 4.6% if they believe that the curve is going to disinvert if the Fed’s going to be able to cut to four. So this was always the sort of make or break moment and the data just didn’t cooperate. So yeah, I see that risk is, is really elevated next week we could very well have what I’d call a bellyache. And what I mean by that is that issuance next week is all in the belly, so-called belly of the treasury curve, twos, fives and sevens and it may not go well. We won’t get any more real negative data until we get to the next round of payroll data and that’s a couple of weeks away. So maybe the market can absorb it without going straight to five on 10s, but we’re in a we’re in a difficult period where the feds in no position to disinvert the curve and help the banking system be able to absorb all that supply.