Inverse Indicators | May 18, 2018

Two main indicators of future market activity were conflicting this past week. Which indicator should we listen to?

Oil prices rose during the week to $72.15 and eventually settled at $71.35. $72.15 marked the highest oil price seen since 2014. Elevated commodity prices are often a signal of the end of an expansion. With an overspend on commodities, consumer discretionary spending often dwindles.

Long term interest rates moved north last week as the 10-year treasury sustained a yield above 3% the entire week. The important thing is that the 2-year Treasury was little changed from the prior week. This is important because an expansion of the yield curve, the space between the 2-year and 10-year yield, means the economy is healthy and unlikely to tip into a recession. The space between the 2 figures is narrow and has been narrower up until this point. So, the increased space is welcomed!

While oil prices are tapping highs not season since 2014, they are no where near their highs from 2008. In fact, they sit at  50% of their 2008 values. There is room to run before that indicator tells us a recession is coming. Likewise, the healthy move in long-term interest rates tells us that consumers can handle the increased cost of borrowing and the economy has room to run, albeit at a slower pace than when 10-year treasuries hovered around 1.67%.

 

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