Yahoo Finance’s Jared Blikre joins the Live show to discuss Fed Chair Powell’s inflation-fighting credibility, as well as the scenarios ahead for the U.S. economy.

Video Transcript

INES FERRÉ: Hoping for interest-rate cuts? Think again after Fed Chair Jerome Powell comments to Congress. The bond market is pricing a steeper path for monetary tightening by central banks.

But what does this mean for the long term? You can read all about the latest in today's "Morning Brief" written by Jared Blikre over at the Yahoo Finance home page. Jared joins us here live in person.

JARED BLIKRE: Yes, everybody wants to know soft landing, hard landing, or the ridiculous no landing, which probably just a delayed recession because you know you're going to get one eventually. But is it off the current economic slowdown that we're kind of watching in slow motion in some areas and not even seeing in another. We were just talking with a JPMorgan wealth strategist about some of the comings and goings in the labor market. Construction jobs are very hot right now. More on that in a second.

But first I want to get to the bond market's reaction here because there was a steep, steep rise in the two-year yield. In fact, it surged north of 5% for the first time since about 2007. I think it hit 5.07% or so, and it has surged above the 10-year yield. So here I have going back to the beginning of the pandemic three years ago the US two-year yield in purple, 10-year yield in blue, cyan, and then the spread between them.

We first got an inversion about the middle of last year. That's really when it started heading south there, and now it has reached 100-- negative 100 basis points. That is the lowest amount since about 1981-1982 when Volcker was fighting inflation.

And let me just get you to another picture of what happened with the entire yield curve. This is the yield curve from one month, two month, one year, five year, 20, 30, the whole gamut here. And you can see in this blue line, this is before Powell. It shifted up to after Powell, at least on the short end of the curve, especially in the realm of the one- and two-year tenures here, and those shot up 17 to 18 basis points.

What that's saying is the Fed is going to raise its rates to a higher level than previously thought and keep them there for a bit longer than expected. And what's happening is all those rate cuts that were priced in for about the first half of next year, 2024, those are getting pushed down the line.

So this sets up a very unrealistic scenario. We were just interviewing-- Julie, you and I interviewed Alfonso Peccatiello of The Macro Compass, and I was using some of his work. He says this creates a credibility issue for Powell. The market is so-- finds Powell so credible that they are pushing out these yields-- these rate cuts in an unrealistic fashion because when we see a crack in the jobs market, when we see an earnings recession, which we may be in right now, that creates additional pressure on the Fed. What the Fed does is usually cut, cut, cut aggressively. So the more we hike in the short term and think that Powell is going to keep these rates for a long time, the more cracks we're going to see potentially and the harder landing we're going to see down the line.

Now, I just want to show a couple charts here. First is the BofA-- ICE BofA MOVE Index. This goes back six months. This tracks bond-market volatility. What I want to show you here is since the beginning of February, we've seen a sharp increase. Now when we see increased bond-market volatility, that weighs on stock prices because it reduces leverage in the system. So we have really kind of given back a lot of those January gains.

Finally I want to leave you with a thought about the labor market here. This is S&P 500 futures this morning on the jobless claims that erred on the hot side. That is we had more people unemployed filing jobless claims than expected. That's a bad number. We got a huge increase-- not a huge but pretty big spike here on that news.

What that tells me is that good news is bad news and bad news is good news in the labor market. This Friday, we're talking about those construction jobs. Those are usually the first to get hit in a recession, so I'm going to be watching that number like a hawk. If we do see a big drop on Friday or in the coming months, probably the beginning of that long-awaited slowdown. So we'll have to wait for that, guys.

JULIE HYMAN: Yeah, and a really interesting stat that Tom Kennedy of JPMorgan just talked to us about was that completions of construction projects are outpacing starts.

JARED BLIKRE: That's key because a lot of people have jobs right now and are not going to have jobs in the future. Employers have been frontloading this and keeping employees. Commercial real estate is picking up the slack, but that can't last forever.

INES FERRÉ: Yeah, an important jobs report tomorrow. Thanks so much, Jared.