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%.

 

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. The information contained herein has been compiled from sources believed to be reliable; however, there is no guarantee of its accuracy or completeness. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. The material provided in Daily Market Commentaries or on this website should be used for informational purposes only and in no way should be relied upon for financial advice. Please be sure to consult your own financial advisor when making decisions regarding your financial management. Members of FINRA and SIPC, Capitol Securities Management is a privately owned full-service retail brokerage and investment advisory firm headquartered in Richmond, Virginia. For nearly 30 years, we have been serving the needs of our investors. Today, more than 200 Capitol Securities Management investment professionals and support staff serve approximately 18,000 customer accounts from Southern Florida to the New England coast.