All of these forces in play: the Kim summit, Italy, Fed, tariffs, inflation, economy, jobs, and the president -- which are drivers, and which are noise?

This week markets told us. And when the Fed finishes its meeting on June 13, markets will tell us a lot more.

The two biggest financial markets are stocks and bonds. Ownership in corporations, and IOUs. The stock market is an emotional place, false signals more common than not, and not a character flaw: future earnings cannot be known. Bonds... we may not know anything else, but we know the interest rate and maturity stamped on the damned things.

The stock market’s two-month peak was on May 21, just as adventures in public policy began to rattle all markets. In Dow terms today, the market is 350 points below that top -- small, but breaking the tentative recovery after the big drops during winter.

The 10-year Treasury yield peaked on May 17 at 3.11%, mortgages at the threshold of 5.00%, anticipating a strong economy and open-ended Fed hikes. By this past Tuesday 10s fell to 2.76% intra-day (35bps is a lot), mortgages nearly 4.50%. Long-term rates have rebounded a little, 10s 2.89% today and mortgages just below 4.75%.

Long-term rates are controlled (mostly) by inflation; short-term rates are set by the Fed, the 2-year T-note the benchmark. 2s topped on May 16 at 2.59%. The Fed’s overnight cost of money is 1.75%, thus 2s anticipating additional hikes. On this past panicked Tuesday, 2s intra-day fell to 2.30%, now back to 2.47%.

Most important: none of these markets is back to where it was before the multi-source panic in the last 10 days. Something(s) is still worrisome, but what?

Italy has a new government as of yesterday, no more stable than its other 60-odd governments since Mussolini but imminent financial/political collapse is off the table. Inevitable, but back to any-decade.

German 10-year bonds peaked on May 15 at 0.648%, the highest yield in three years reflecting a better European economy and anticipating the ECB gradually shutting down its money hose. In Tuesday’s panic German 10s fell to 0.255%, and today have rebounded only to 0.388%.

Right there is the key clue: Italy is off, so what is still troublesome to Europe, sustaining panicked buying of German bonds?

Tariffs and tariffs. Same in the US. The Kim summit if it happens will be a photo opp, or maybe the first in a long process, or if it does not happen just back to status quo.

The May employment report was strong, double the job growth which the Fed thinks is sustainable, and all of the evidence and cover the Fed needs to continue upward.

The president is wearing out everyone in markets, even those who like many of his policies. This morning’s tweet three hours in advance of the job-data release, “Looking forward to seeing the employment numbers at 8:30 this morning”, was disgusting to traders of any political bent. Of course his standard cutesy-ambiguous style, but everyone knew what it meant and traded on it. Every trading desk studies the release of new data, knows exactly who has the data before public release, and is on constant alert for the slightest leak ahead. At the Fed, the Department of Commerce, the Bureau of Labor Statistics... at every data-generating agency or private source, a leak is demoralizing. A shoulder-sagging, head-down devaluation of the work that they do, and traders apoplectic.

Tariffs and the Fed. The Fed will hike again on June 13, stick with “data dependent” to describe future action, but will not stop at 2.00% or 2.50% so long as job growth continues as now. The only explanation for suppressed markets since Tuesday, not fully rebounding: tariffs. The extent of trade war cannot be known, but even if modest there is also growing collateral damage. We are head-slapping our allies -- what happens when we need a friend? What is the point of making any deal with the United States if it feels free to demand unilateral renegotiation at any time? The president loves to wield this power, but the world is not the same as New Jersey and small-time deal guys out-crooking each other.

The most immediate tariff effect is not likely to be full-go trade war, just small reprisals, audible teeth-grinding, and a quiet but unprecedented overseas hatred directed at us. If we cancel Nafta, then the international fabric of trade rules and manners goes also.

The Fed. Technical, eye-glazing, but the big, big deal for mortgages: what happens to the 2s-10s spread after the Fed hikes again? Last fall the 2-year Treasury was 1.40%, and 10s 2.40%, the spread one whole percentage point. Since then 2s have been pushed up by the Fed faster than 10s have risen in anticipation of a hotter economy (fiscal stimulus), inflation risk, and the Fed.

In April the 2s-10s spread closed inside one-half percent, and since then has held a mechanical, lurching Frankenstein spread centered on 0.45%. All through the tops in May and panic in the last week, bolted together.

On the 13th the Fed will go from 1.75% to 2.00%. 2s-10s follow, mortgages will reach 5.00% and we’ll wonder again, how high before housing cracks.

If 10s do not follow, that’s the warning to the Fed that it’s closer to being done than it may think, and further hikes risk recession.

Us 10-year T-note. As panics go, a pretty good one, but 2.90% held:

The US 2-year T-note. I think the 2s-10s spread will tighten on the 13th:

The administration and supporters will be thrilled by second-quarter GDP north of 4%, but it’s just a rebound in weak consumer spending in the first quarter and will likely back off to 2%-something in the rest of the year:

The ECRI’s long-term perspective is the best, and has us right in the sweet spot of modest, non-inflationary growth: