Stocks battered by Wall Street, fears of U.S. slowdown

07 December, 2018, 19:11 | Author: Eric Barnett
  • The Flattening Yield Curve Just Produced Its First InversionsMore

In an "economic letter" published by the San Francisco office of the U.S. Federal Reserve (Fed), Michael D. Bauer and Thomas M. Mertens summarize the implications of an inversion succinctly: "Every U.S. recession in the past 60 years was preceded by a negative term spread, that is, an inverted yield curve". Meanwhile, the U.S. Federal Reserve Chairman Jerome Powell had commented during last Wednesday that U.S. interest rates were nearing neutral levels.

Lyngen said the inversion of three- and five-year yields had increased the likelihood that an inversion of the two- and 10-year yield would happen by early 2019. It has sometimes taken more than a year for a recession to occur after the yield curve inverts.

The Dow Jones Industrial Average fell 799.36 points, or 3.1 percent, to 25,027.07, the S&P 500 lost 90.31 points, or 3.24 percent, to 2,700.06 and the Nasdaq Composite dropped 283.09 points, or 3.8 percent, to 7,158.43.

Global equities have been shaken as a flattening US Treasury yield curve - a result of a steep fall in longer-dated yields - fanned recession jitters and as US-China trade conflict woes resurfaced after a temporary lull.

The dollar stumbled last week after Federal Reserve Chairman Jerome Powell on Wednesday said USA rates were nearing neutral levels, which markets interpreted as signaling a slowdown in rate hikes.

Another big recession indicator is the recent weakness in housing.

Bob Michele, who heads global fixed income for JP Morgan's investment arm, said he doesn't expect the USA yield curve to invert, but he was watching it closely.

There have also been false positives in the past, where the yield curve has inverted but no recession has followed, such as in 1966.


Gundlach said Fed policymakers will need to be especially careful in their choice of words when they meet on December 18-19 to deliver on their promised rate hike.

Regardless of other possible reasons, "it is mainly indicative of worries about how long growth in the US can remain so strong". Rather, I suggest there should not be a Fed at all and interest rates should be left to the free market.

MSCI's gauge of stocks across the globe shed 2.16 percent, its worst performance since October 11.

But since then, it has persistently declined, especially since the middle of last week, and now is at its narrowest since July 2007, on the eve of a steep recession. However, when investors expect interest rates to decline in the future - typically because of a weak economy - they scramble to lock in today's comparatively high interest rates for as long as possible.

On Monday, the difference between the two-year and 10-year Treasury yields dropped to just 0.15 percent, its lowest level since prior to the last USA recession.

"Lower inflation expectations, induced mostly by the drop in oil prices and also in part by soft inflation data; and a lower term premium, likely pushed down by deteriorating sentiment about global growth".

The outlook for USA growth, by contrast, he said remained strong.

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