What does the inversion of the yield curve mean for markets

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Published Date 8/14/2019

Market volatility continues to roil markets. Overnight the 10 yr note yield fell to 1.61%, the 2 yr note at 1.62%, the first time the two have inverted since 2007 about six months before the financial crisis. Fears continue to increase that the US is moving toward recession, the inversion, although not much so far is a historical measurement that is seen as a recession warning. The yield curve inversion sent stock indexes lower, at 7:30 am ET the DJIA -327 after the index increased 368 yesterday and on Monday -391. The Fed likes to look at the difference between the 3 mo T-bill and the 10 yr note. It has been inverted since March. The 30 yr bond yield fell to an all-time new low.

The inversion of the curve isn't just confined to the US. In the UK, 10-year yields dropped two basis points to 0.475%, while those on two-year bonds rose one basis point to 0.478% even as inflation jumped above the Bank of England's 2% target. Most of the analysts and pundits that are interviewed on CNBC, Bloomberg and Fox News still are holding that the US won't move into recession (2 consecutive quarters with lower GDP growth), but more and more the real data is becoming harder to ignore. China reported the weakest growth in industrial output since 2002. Germany's Q2 flash GDP contracted 0.1%, as expected (last 0.4%) and was unchanged yr/yr (expected -0.3%; last 0.6%). It isn't all the data that is signaling a potential recession, the Eurozone's Q2 flash GDP increased 0.2% qtr/qtr, as expected (last 0.2%), growing 1.1% yr/yr, as expected (last 1.1%). Q2 Employment Change increased 0.2% qtr/qtr (expected 0.3%; last 0.3%) while June Industrial Production decreased 1.6% m/m (expected -1.4%; last 0.8%), falling 2.6% yr/yr (expected -1.2%; last -0.8%).

With trade wars, cooling global demand and geopolitical crises all combining to hit growth, the world economy is heading for its weakest expansion since the financial crisis. Central banks cutting rates as the Fed will again next months. The markets are wanting more fiscal stimulus and trying to head off, by manipulation what is inevitable, a normal slowing after years of expansion. Consumers still holding up the economy while manufacturing is slowing, the service sector also holding presently. The question is how long these pluses will resist natural forces?

Earlier this morning, the weekly MBA mortgage applications increased 21.7%, purchases were up just 2.0%, but refinances increased 37.0%. Most mortgages originated since the beginning of this year are possible refinance opportunities.

July import and export prices were both stronger than estimates. Imports were thought to be -0.1% but increased 0.2%; yr/yr imports -1.8% on forecasts of -20%. Export prices also +0.2% on forecasts of -0.1%; yr/yr -0.9% with estimates of -1.2%. Still weak but a tad better, no market reactions.

Trading the bond and mortgage markets these days with the high levels of volatility is adding to risk. Most of the recent big movements in the equity and interest rate world are coming from trading in Asia and Europe. When the US opens recently the rapid changes have already taken place putting risk higher for US trading. Our technical indicators and proprietary models continue to remain bullish for interest rates. You don't need to look farther than the last three days to get the picture.

Source: TBWS

All information furnished has been forwarded to you and is provided by thetbwsgroup only for informational purposes. Forecasting shall be considered as events which may be expected but not guaranteed. Neither the forwarding party and/or company nor thetbwsgroup assume any responsibility to any person who relies on information or forecasting contained in this report and disclaims all liability in respect to decisions or actions, or lack thereof based on any or all of the contents of this report.

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