14 August 2019
The US has already seen other parts of the yield curve invert, with the 10-year rate falling beneath the three-month several times in the last 12 months. But this is the first time in a decade that that investors have seen the 2-year/10-year inversion - a more accurate indicator of recession than the 3-month/10-year relationship.
The move came despite President Donald Trump’s announcement that many (mainly consumer-related) Chinese imports would be temporarily exempt from tariffs. However, the relief for markets proved short-lived, and yields fell again on Chinese retail sales data and negative German quarterly growth numbers. The S&P 500 opened down 1.4 per cent and continued to fall in early trading.
Against the slowing global growth backdrop and a US earnings season that so far has been mixed, markets are essentially telling the Fed, via the yield curve, that it may have to do more. Given how much is priced in already, it will be difficult for the Fed to ‘out dove’ market expectations, but at the very least they will have to maintain a dovish stance and cut rates further and possibly faster. At present, we expect one to two more rate cuts this year.
We remain positive on US treasuries, although we have taken some profits given the size of recent gains. While we see no immediate signs of a US recession, we expect the Fed will need to overlook an uptick in core inflation in July and still-strong consumer data and loosen policy further to keep yields in check.
Source: Refinitiv, August 2019
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