"Here's a bar chart of my favorite pies. And a pie chart of my favorite bars." Marshall Ericson HIMYM
More data, more complexity, another brief chat with "must follow" Fed guy Matt Boesler of Bloomberg News. @Boes_ if you've been in a coma.
Longtime readers know a simple cocktail party trick we've talked about before as to GDP (Nominal or Real) and the 5 year Treasury yield. Basically, outside of recessions, the 2 should track each other. After the financial crisis and the introduction of QE/LSAP monetary pornography, the relationship morphed toward the 10 year yield. The "fudge-y factor" is the CPI as we compare a nominal yield to a real statistic. See @groditi 's earlier contribution on this.
Anywho, today's data have the GDP at 2.3 and the 10 year at 2.27. The 5 year settled at 1.62 and core PCE was up a smidge. The curve FLATTENED aggressively. So, if "Normalization" includes the process of reverting back to the old tried-n-true compass of 5 year yields, then two things can be inferred:
1. Short rates need to rise even at the present so called "anemic" growth rate. (Spoiler Alert-THEY ARE)
2. The transition to normalization will be less volatile the narrower the 5/10 spread (double spoiler-see flattening above).
Marginally slower growth rates make the transition more nerve racking, not unlike earlier this year. Nonetheless, a committed CB would still want to normalize the term structure and avoid the chart spike of the otherside - where rates are held too low relative to Nominal Growth...and Peter Schiff gets unlimited air time.
Have fun shooting down the concept, amazing your cocktail party guests with your knowledge, or suspend your disbelief and ride along.