U.S. yield curve and beyond
As we h nted last week, var ous spreads tell strange stor es. One th ng s clear though: the U.S. y eld curve r sks becom ng nverted unless 10-year y elds go up before the next two FFR h kes and adjust thereby or the Fed stops h k ng ts FFR.
Core PCE to consumer durables to non-food reta l orders growth rate compar sons y elded a stab l zat on p cture recently, but n the last decade the marg ns w dened all too often. We would l ke to note that n 1937, the economy was already on ts way out of the depress on but there was a temporary setback, a one-off m n -recess on embedded w th n the p cture. Such th ngs happen because of monetary pol cy m sal gnment.
W th U.S. 10-years go ng up to 3.25 percent only to cl mb further to g ve enough slack to the three percent (2.9 percent?) new neutral FFR and the long end’s marg n – hence rest ng above 3.50 percent eventually - the real rates of nterest n terms of EM local currenc es w ll have to adjust quas automat cally. The mpact won’t be a mere 50-100 bas s po nts.
The flatness of the curve s a danger because n the past, the three-month LIBOR to U.S. 10-year spread runn ng negat ve proved to be a s gn of recess on. Although a remote poss b l ty for now, many reports d rectly or nd rectly state such a l kel hood sn’t zero. Already the BIS, the WB Outloo and a recent PIMCO post convey such concerns.
The propens ty to lend would be lower w th an nverted curve as banks’ matur ty transformat ons would be curta led. Th s s what m ght tr gger a normally unant c pated econom c
Clearly, the poss b l ty of U.S. 10-years go ng up suddenly – a normal outcome that s currently prevented due to the return to safe haven behav or - would g ve way to a very unpleasant monetary ar thmet c. Already TRY
nterest rates are
h gh, nflat on
s st ll below ts peak, and everyth ng hangs by a