Trump slams Fed about inverted yield curve

Strong signs show worsening US-China trade relations and slowing global growth
Chief Investment Office15 Aug 2019
    Photo credit: AFP Photo


    The US government bond market sounded alarms Wednesday (14 August) as investors fleeing riskier assets drove the 30-year bond yield to a record low and the 10-year yield fell below the rate on the two-year for the first time since 2007.

    The 10-year Treasury yield dipped as much as 1.9 bps below the two-year yield in what is considered a harbinger of a US economic recession beginning in the next 18 months. That expectation, nurtured in recent weeks by worsening US-China trade relations and signs global growth is slowing, was bolstered Wednesday by weak Chinese and German economic data. The so-called inversion drew US President Donald Trump’s ire, who tweeted Wednesday that Federal Reserve chairman Jerome Powell is “clueless”.

    Another widely watched recession indicator, the yield difference between three-month and 10-year Treasuries, inverted in March and has been negative much of the time since, bedevilling investors who anticipated that the yield curve would steepen as the Federal Reserve began to cut interest rates. The global bid for bonds also inverted the two-year to 10-year UK yield curve Wednesday.

    The inversion was brief as US 10-year yields rebounded from as low as 1.57% to about 1.58%, while two-year yields shifted up to around 1.58% late in the US day. Thirty-year yields at one point fell to a record low of 2.01%.

    Yield curves normally slope upward as investors demand compensation for putting money at risk over longer periods of time. The willingness to accept lower yields on longer-dated assets than shorter-dated ones offer reflects the expectation that the longer-dated ones will produce higher returns over time as all yields decline, leaving holders of shorter-dated instruments to reinvest at lower rates when they mature. – Bloomberg News.

    The Dow Jones Industrial Average declined 3.05% to 25,479.42 and the Nasdaq Composite Index lost 3.02% to 7,773.94. The S&P 500 Index also fell 2.93% to 2,840.60.



    The European Central Bank (ECB) blasted banks for slow-walking their Brexit preparations, telling them to move additional staff and resources to the European Union (EU) in case Britain leaves without a deal on 31 October.

    The central bank said firms have transferred “significantly fewer activities, critical functions, and staff” to their EU operations than originally foreseen, according to a statement on Wednesday (14 August). The ECB said some banks are falling short of their supervisory expectations and cannot continue to rely so heavily on servicing EU clients from their branches in the UK.

    With the Brexit date postponed from March, several financial services firms in London refrained from building up further reserves in the Euro Area as demanded.

    The ECB requires banks to hold enough funds to ensure they can absorb potential losses at their European units. Banks in the region rushed to set up subsidiaries in the Euro Area and negotiated the capital levels required to do so with the ECB. In its push on Wednesday, the supervisor also reminded firms to keep building “local risk management and governance structures”.

    Financial firms were also told by the ECB to make sure they have sufficient access to critical market infrastructure, which could be disrupted due to Brexit. Many EU-based banks currently use derivatives clearinghouses in London for their trades and as things stand, access will end next March. – Bloomberg News.

    The Stoxx Europe 600 Index fell 1.68% to 366.16 on Wednesday (14 August).



    Japan’s equity investors are looking beyond the most disappointing earnings in three years, betting on a turnaround in the market on the view that valuations are cheap, and the Bank of Japan will step up easing.

    Some 60% of the 1,572 companies that reported first fiscal quarter earnings as of 6 August are behind schedule, achieving less than 25% their annual net profit targets, according to Bloomberg. Analysis from a financial service company shows that the proportion of the firms beating earnings expectations dropped to the lowest in fiscal 2017.

    Still, stock bulls are quick to point out that shares are getting cheap now that the Topix Index has erased its year-to-date gain. Japan’s benchmark has been one of the worst performers among the 24 Developed Markets tracked by Bloomberg for months. Its forward price-to-earnings ratio dropped to around 12 times, compared with a five-year average of 13.4 times.

    For those investors worried about the yen’s strength, a Japanese investment bank says the currency’s surge to a seven-month high against the dollar is not drastic enough to alter the outlook for profit growth for the second half of this fiscal year. The yen is at about 106.4 per dollar, vs the rate of 108 forecast in many companies’ annual results.  – Bloomberg News.

    The Nikkei 225 Index traded 1.89% lower at 20,264.72 early-Thursday (15 August) morning. It fell 1.11% to 20,455.44 the previous session.

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