Globally, government bond yield curves have flattened as central banks started signalling the end of the era of ultra-loose monetary policy. But the flattening of yield curves accelerated last week after the UK reduced bond-issuance plans and the Bank of Canada accelerated the time of potential future rate increases.
The flattening was so striking that the longer end of the US Treasury market, the 20- to 30-year segment, became the first to invert.
Curve inversion is not a good omen; it almost always portends some form of sell-off/recession by roughly 18 months. In addition, the end of easy money may have other impacts on jittery investors.
The chart shows the 10- to 30-year US Treasury spread – a proxy for uncertainty in the medium term – and the MOVE Index which measures short dated volatility, i.e. the price of risk.
These were closely related until central banks stepped in post credit crisis; with the Fed stepping back, we may see further normalisation either by deeper curve flattening or an increase in forward looking risk. It could be a bumpy ride.
Inflation out of control? You might expect to see an inflation chart like this in an emerging market, but this is happening in the 5th largest economy in the world.
The almighty (and confusing) US consumer. US economic health is intricately tied to consumer behaviour with personal consumption accounting for ~70% of GDP. Predicting whether or not Americans will keep opening their wallets for a new car, a night at a restaurant or a nice vacation has far reaching implications.
Pricing power is back! Inflation remains top of mind for investors but has filtered through to Main Street. This chart from Macrobond Financial shows that more companies are planning to raise prices than at any time in the last twenty years.