Yield Curve
How Will It Be Remembered?
A way to gain perspective on the present is by trying to view it from the future. Ask yourself, “What are the signs of impending decline, now ignored by investors, that will one day be memorialized by the same investors as the most obvious in retrospect?”
Questioning The Monetary Rebound
.jpg?fit=fillmax&w=222&bg=FFFFFF)
This year’s upswing in money-supply growth has been one of many factors that’s prevented our economic work from triggering a recession warning. Following a two-year decline, year-over-year growth in M2 bottomed near 3% late in 2018 and has trended upward all year, reaching 6.7% in the latest week (Chart 1).
More Yield Curve Musings
The U.S. yield curve inversion has lasted long enough that even a few economic optimists now concede it will ultimately prove significant.
More Trends We Don’t Find Friendly…
The yield curve’s ten-month moving average inverted in September, hence the yield curve inversion can no longer be dismissed as transitory; the Boom/Bust Indicator remains below its descending 10-month moving average, confirming economic weakness predicted by the yield curve; and, the “Present Situation” component of September’s Consumer Confidence survey slipped below its 10-month moving average for the third time in 2019.
Monetary Madness
We always do our own work and draw our own conclusions. Lately, though, we’ve wondered what the late “Monetary Marty” Zweig might say about the stock market’s current liquidity backdrop.
Recession Evidence: How Much Is Enough?
Over a 12-month horizon, we now believe a U.S. recession is very likely, but aren’t confident enough to make the call when the forecast window is cut in half. Second-half stock returns could be decent if the business-cycle peak is still a year away. Then again, there’s peril in waiting for “too much” confirmation of recession.
All That You Don’t Hear About The Curve
While the 10Y-3M curve inversion does warrant extra attention, movements in other parts of the curve also need to be taken into consideration.
Bust To Boom, And Back Again
Last month, we observed that crude oil was the only item propping up broad-based commodity indexes, and that something was bound to give with the U.S. dollar pushing to new highs.
Signs Of Spring For Financials
Signs of spring are popping up everywhere in the Financials sector. S&P Financials was easily the top- performing sector in April and several sub-industries have been bubbling higher in our Group Selection discipline.
Inveighing Against The Inversion
Some recent headlines are word-for-word regurgitations of those published in response to the early-2006 yield curve inversion. In that case, the naysayers were temporarily correct, as both the U.S. economy and stock market pushed higher for another year and a half before rolling over.
Watch What They Do, Not What They Say
While the celebration over Jerome Powell’s “Christmas Capitulation” lingered throughout February, we’re still awaiting signs the capitulation consisted of anything more than words.
Yields Might Be Throwing A Curve
While the number of recession forecasts is on the rise, there’s a general reluctance among economists to project a downturn in the absence of a yield curve inversion.
About That Great Jobs Report...
The December employment report temporarily eased fears of a severe U.S. slowdown. That’s a mystery to us.
Deep-Six The “Threes-Fives”
We’ve sometimes called the yield curve our “favorite economist,” so we were amused when some enthusiastic data miner in the Treasury market tried to slip us a cheap imitation in late November.
Beware The Policy “Narrative”
It’s been amusing to watch the narrative surrounding Fed policy evolve as the market has rallied.
Yield Curve Proxy—A Tool For Equity Investors
The increasingly greater attention given to the yield curve by equity investors has prompted us to come up with an equity basket that can track the movement of the yield curve. Overall, it does a reasonably good job of capturing the major moves.
Assessing The Correction
How do today’s cyclical conditions stack up with those accompanying other stock market declines?
What The Curve Does And Doesn’t Tell Us
The gap between the 10-year Treasury yield and the federal funds rate has narrowed sharply in the last year but remains a long way (~110 basis points) from inverting.
All Crowded Trades Are Vulnerable—Even The Yield-Curve Flattener
Bond market volatility picked up quite a bit in May but the higher-low/higher-high pattern in the 10-year yield is still intact, indicating the primary uptrend has not reversed.
U.S. Rates: Looking For A Dip
The U.S. 10-year ended the month 15 bps higher but non-U.S. bonds fared much better with bond yields in Europe and Japan 4-5 bps lower.
Anatomy Of A Flattening Cycle—Flatter For Longer
The calm appearance of the 10-year yield masked a big curve-flattening move that has accelerated the last few months.
Stocks And The Economy
The stock market is often maligned as a poor economic forecaster, and it’s true the market has predicted several more recessions than have actually occurred.
Bond Conundrum—This Time Is Not That Different
Despite the late reversal in rates and the yield curve, the flattening trend of the yield curve remains intact. The fact that longer-term bond yields have fallen while the Fed is raising rates brings back memories of the “bond conundrum” episode during 2004-2006.
Is The Yield Curve Overrated?
The U.S. yield curve has flattened in the last few months but remains a long way from inversion—an event that’s preceded each of the last eleven recessions.
Navigating The First Rate Hike
Our current view is the lift-off will be December or later. Assuming inflation will pick up and the Fed hikes the rate by the end of 2015, stocks will perform relatively well, with international stocks a better bet than U.S. stocks.
Steeper Yield Curve: All About Inflation
The steepening move in the yield curve is prevalent across many countries and is primarily driven by higher inflation expectations.
Yield Curve Too Flat? Short Term Maybe, Longer Term Probably Not.
With the Fed policy approaching actual tightening, the market is trying to price in a rate hike in the next year or so. This is a rather typical market response.
Twisty Curves
The short end of the yield curve sold-off to price in an earlier-than-expected rate hike, while the long end rallied as the prospect of tightening reduced longer-term inflation expectations.
Duration: It’s Not Just For Bonds Anymore
We measure the sensitivity of common stocks to changes in interest rates using Implied Equity Duration. Growth-oriented sectors tend to have higher duration than Value-oriented sectors, while regional differences are largely explained by interest rate and risk premium differentials.
Global Yield Curve Confirms “Muddle Through” View
The global yield curve is in a sideways range bound pattern, indicating anemic demand for credit. An examination of developed and emerging countries confirms our “muddle through” view.
Risk Contagion Underway, But There Is A Silver Lining
A Risk Contagion is now underway, and we continue to stay defensive and favor higher quality assets within the fixed income space. A silver lining: When the Risk Aversion Index moves above 1, odds start to favor a decrease in risk aversion going forward. The bulk of the move is probably done.
Market Interrelationships: “Unlearning” What We Thought We Knew
Doug Ramsey examines several once very reliable relationships between stocks, bonds, inflation, and commodities.
Demise Of The Inverted Yield Curve...Greatly Exaggerated?
Recession risks don’t disappear the day the yield curve rights itself....the “window of vulnerability” extends for quite some time.
Yield Curve Moved Positive In May, But We Are Not Out Of The Water
The yield curve has moved away from inverted status, leading many to conclude the possibility of recession has been avoided. However, a look at past recessions reveals that a reversal of an inversion typically occurs prior to the economic decline– ranging from 6 months to over a year in advance.
View From The North Country
Doug Ramsey steps in as guest commentator in this month’s “View From The North Country” to highlight what we currently see as the bullish arguments for the stock market and contrast those with the bearish arguments.
Economic Outlook
It may be difficult for the economy to prolong its expansion, with the auto and housing sectors weakening, and consumer spending a big question mark.
Economic Outlook
Continue to project higher interest rates over the next six months, particularly longer maturities. After rate hike in May, Fed’s actions will be more “data driven”.
View From The North Country
Steve presents the transcript of his April 3rd interview with Barron's Senior Editor, Sandra Ward.
Has The Yield Curve Lost Its Luster?
The traditional definition versus the new definition of an inversion...How real GDP has responded historically to past yield curve inversions….Effect of inversions on Financial stocks.
View From The North Country
The persistent rise in short term rates could have a big impact on the consumer. The rising prime rate has boosted debt service costs substantially, and “Financial Death Traps” may be on the horizon.