Yield curve flashes a warning but path to expansion’s end has only just begun

Shorter-term interest rates spiked further over March and into April as the Federal Reserve signaled that it will be aggressive with rate hikes in coming months in order to slow inflation — resulting in a fleeting inversion of the 2- and 10-year Treasury note yields. But better recession indicators aren’t as ominous and tightening cycles take time to slow economic momentum, suggesting that the expansion still has room to run before the next downturn.

Key Takeaways:

• The labor market rounded out a strong first quarter with another solid gain in March as hiring demand remains robust and unemployment rates are nearly back to their pre-Covid lows.
• Food and energy costs spiked again in March, due most recently to impacts from the Russian invasion, sending inflation readings to new 40-year highs.
• Fed commentary and market expectations point to a 50 basis point rate hike at the upcoming May FOMC meeting — the first move of that magnitude in more than 20 years. Interest rates continue to climb, with the yield curve positively sloped across almost all of its entirety.
• Equity markets continue to have difficulty finding traction in 2022 amid the crosscurrents from prospective rate tightening, rising inflation, and geopolitics — with most broad domestic indices only modestly above recent lows.