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US Stocks Hit Bottoming Phase


Time to buy on the cheap -- cautiously.

Is the yield curve pointing to better tidings?

While the deflation/inflation debate rages on, the jump in US government bond yield (and stronger commodities and weaker US dollar) seems to indicate that deflationary pressures are moderating.

The chart of the US 10-year Treasury Note yield shows a clear uptrend since the end of last year, with the yield also now trading above both the 50- and 200-day moving averages.

The graph below shows the relatively flat yield curve (red line) immediately prior to the first rate cut in September 2007. As indicated by the black line, the yield curve has steepened dramatically since, as monetary policy kept shorter maturities at low levels while longer maturities have been in a rising trend.

A steeper yield curve typically heralds better tidings for economic growth, although concerns about massive issuance also come into play. The graph below shows the close relationship between the US GDP-weighted Purchasing Managers Index (PMI) and the US 10-year Treasury Note yield.

This raises the question as to what the impact of the yield curve typically is on the stock market.
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