Yield Curve Inversion Rattles Financial Markets

And the inversion deepens. Today the spread between the yields on 2- and 10-year Treasurys fell further to -5bps, a level of inversion that was last observed in 2007. The fun fact that usually accompanies this phenomenon reads: every recession over the past 50 years has been preceded by an inversion in the 2s10s spread. The timing of any recession is more unpredictable in nature, with the average lag time being about 22 months post-inversion. While strong unemployment and steady payroll additions may not support such a cause for concern, stagnant inflation and ever-growing trade wars have left financial markets with more ambiguity than the ending to a Quentin Tarantino film. Treasury yields and swap rates are now nearing all-time lows, with the yield on the 10-year note finishing at 1.47% and the 30-year yield closing at 1.95%.

 

 

Blurring the politics-policy line. In an op-ed published this morning, former New York Fed president William Dudley presented a combative stance to the President Trump’s persistent declarations for the Fed to cut interest rates. In the piece, Dudley noted the risk that reductions to benchmark interest rates would allow Trump to further escalate trade wars, going as far as to say “Trump’s re-election arguably presents a threat to the U.S. and global economy, to the Fed’s independence and its ability to achieve its employment and inflation objectives”. A Fed spokesperson quickly dismissed the idea that the US central bank would shift its apolitical approach to monetary policy, however that didn’t stop President Trump from further criticizing in a tweet this morning –  “Our Fed has been calling it wrong for too long”.

 

 

Major US equity indices declined on the day as recession fears continue to build momentum. The DJIA erased a morning rally to finish the trading session down -0.47%, as major bank shares broadly fell more than 1%. The price of gold climbed 1% to $1,540/ounce as demand grew for safe haven assets. In energy markets, crude oil futures managed to break a four-day losing streak, finish 2.4% higher after industry data presented a larger than expected drawdown in inventories last week.