25 Mar COMMENTS ABOUT THE CURRENT YIELD INVERSION
The “official” yield curve inverted Friday, defined as the 90 day Treasury yielding more than the 10 year Treasury. This is the first inversion since 2007. The catalyst for this inversion was the Fed’s surprisingly dovish turn amplified by a zero percent yield on the German 10 year bond.
Every recession has been preceded by an inverted yield curve but not every yield curve produces a recession. I once read the data as to how many times the yield curve inverted since WWII. If memory serves correct it was around 40 times.
However there has only been eleven recessions during this period. Moreover Bloomberg writes there has been 45 “predicted recessions,” a prediction that has perfect prediction rate of 0.0%.
In other words all eleven recessions were not predicted.
Many times I have commented about the velocity of change. Three months ago US central bankers thought they would be returning to the days of on-target inflation, full employment and interest rates and an era of quantitative tightening. The 10 year was yielding around 3.25%. I had commented at that time the increase in yield was stealthy.
In my view the move to today’s dovish outlook was a serious about face. Since September 2017 the Committee had signaled they would probably need to eventually raise rates above their estimate of the so called neutral level for the economy—which neither slows nor spurs growth—to slow the expansion to protect against the possibility of higher inflation.
Several high profile luminaries are questioning the radical change, rhetorically asking will the central bank again dramatically alter its outlook in several months because of rising wages and input costs.
I think there is a deeper issue at hand. The collective “we” does not understand and which the markets are grappling with, the impact of incredibly low rates throughout the developed world and the massive amount of liquidity that was injected into the financial system because of global QE.
This lack of understanding amplified by the massive change in market trading mechanics and the gargantuan proliferation of passive investing has created an environment where the eventual outcome is perhaps unquantified. “We” have never been in this environment thus there is a lack of benchmarks.
Commenting about Friday’s activity, the popular indices—led by technologies and financials– fell Friday anywhere between 1.75% and 2.25% on growth concerns. Treasuries surged. Maybe bad is now bad. If this is indeed the case the next several months can be volatile.
Will this week’s economic data influence the outlook? There are several housing statistics and sentiment indicators released as well as personal spending and income and revised fourth quarter GDP.
Last night the foreign markets were down. London was down 0.40%, Paris down 0.27% and Frankfurt down 0.27%. China was down 1.97%, Japan down 3.01% and Hang Sang down 2.03%.
The Dow should open nominally lower on growth concerns. And then there are politics, the politics of France, Germany, Britain, the US. Talk about change and infinite number of potential outcomes!! The 10-year is off 5/32 to yield 2.46%.