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Bulls Hold Ground Amid Yield Curve's Bear Steepening: What's Next?

Published 29/11/2023, 08:42
Updated 20/09/2023, 11:34

It was another pretty slow day on Tuesday, with most of the action in the bond market, with the 2-year falling by 15 bps, resulting in the yield curve steepening with the 10-2 Year Treasury Yield Spread rising by around eight bps to -42 bps.

It looks like the move lower in the 2-year started around 8 am, which was when the German preliminary CPI reading for November came in below estimates, falling by -0.1% m/m vs. last month’s flat reading, while year-over-year CPI rose by 3.5% versus October’s 3.8%. The harmonized CPI for Germany for November fell -0.5% versus -0.2% in October while coming in at 2.7% y/y from 3.0% y/y in October.Germany 2-Yr Yield-Daily Chart

Those were some pretty big drops in inflation for Germany, and it sent the Germany 2-Year yield down seven bps on the day, which helped push the US 2-year down. The US 2-Year took another step down around 10:35 am ET when Chris Waller noted that the Fed could cut rates some next year if inflation rates in the US keep coming down.

This would seem like common sense, given that if inflation rates come down and the Fed Funds rate doesn’t go down, monetary policy would grow more restrictive, as real rates go higher. So, one would expect the Fed to cut as inflation comes down. Of course, the question is how much inflation comes down and how much the Fed cuts.US 2-Yr Yield-5-Minute Chart

If the curve continues to steepen, S&P 500 is likely to sell off. The curve has been driving stocks for a while now, and while stocks did not sell off yesterday, a steepening yield curve will make it very hard for stocks to rally.US10Y-US02Y-2-Hr Chart

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United Health Updates Earnings Outlook

Meanwhile, UnitedHealth (NYSE:UNH) updated its 2024 earnings outlook yesterday; the guidance may have come in a bit mixed, with adjusted earnings at the mid-point of $25.75 versus estimates of $27.83. Meanwhile, revenue guidance came in at $401.50 billion versus estimates for $394.97 billion.

Operating cash flow is expected to be $30.50 billion, less than analyst estimates of $31.5 billion. This stock is trading down about 50 bps after hours; it’s not a big deal. But this will be one to watch today, considering it has the largest weighting in the Dow Jones Industrial Average at 10%. The stock has been trading sideways and is now at the upper end of the range, so a move lower in UNH would probably indicate the Dow moves lower.UNH-4-Hour Chart

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