It’s another one of those mornings where ES is taking its cues from a timely VIX smackdown, erasing a modest overnight loss and promising to add to yesterday’s rally.

But, today is actually different, with the 10Y gapping lower as stocks creep higher.

It could be a delayed reaction to yesterday’s sharp selloff in oil and gas. On the other hand, it could be a sign of turbulence ahead.

continued for members…The big picture:

As VIX breaks down from the falling red TL… …it runs smack dab into the channel bottom. As far as interest rates go, oil and gas have definitely contributed to the decline. But, what if they broke down below our recently reached targets? It would certainly help with inflation.

As we discussed yesterday, the year-ago August drop in RB argues for the current RB price to not bounce off its SMA200.Now that the 2s10s is inverted again, we have to ask what the best outcome would be. At -19 bps, it’s at the same level as it was in Nov 2006, but nowhere near Aug 2000’s -49 bps.

The Fed obviously wants the 10Y to remain elevated, but not too elevated, so as to facilitate a soft landing if/when the time comes and to prevent long-term financing difficulties for a country with over $30 trillion in debt. They probably don’t want to cause another crash in real estate markets.

A rise in the short end would slow the economy down effectively without wreaking havoc with structural issues, but would lead to an even greater inversion if the 10Y doesn’t fall along with it.  Again, it’s good to look back at what happened before.CPI neCPI neared 4% in Mar 2000 – the same month SPX topped out – from a base in the 1.50% range two years earlier. The 2Y had risen from 3.8% to 6.9%, while the 10Y rose from 4.4% to 6.8%. They toppled to 1.1% and 3.2% respectively by June 2003, when stocks also bottomed out.  By then, inflation was solved – back in the 2% range.

The stock market obviously tanked right along with them – beginning with 2s10s’ recovery from inversion and subsequent breakout – a phenomenon we refer to as “inversions cause corrections; breakouts cause crashes.”

I’ll be diving into this and the 2005-2008 inversion over the next few days.

Stay tuned.