Morning Commentary: Yield Curve Inversion – A Potential Ominous Sign

A daily summary and commentary of events and factors that affect the global markets, with a particular emphasis on the foreign exchange markets.

Yield Curve Inversion – A Potential Ominous Sign Share this story: Alan Rose Foreign Exchange Senior Trader

After yesterday’s optimism surrounding Brexit and the U.S.-China trade negotiations spurred a stronger British pound, Chinese yuan and many other commodity linked currencies, markets are generally sidelined and consolidating today. The big event on the calendar today is the Fed minutes from January. The Fed pivoted, reversed course and shifted to a more dovish bias and the word “patience” became the new flavor of the day for the Fed. How the markets interpret the Fed minutes from January today will be very important for the U.S. interest rate markets and all other asset classes.   Yield curve inversion is a very important metric for the market and occurs when U.S. short term interest rates move above longer term U.S. yields. The standard barometer for measuring this phenomenon is when U.S. 2-year yields cross above U.S. 10-year yields. The spread currently is around 15 bps but got down to 9 bps in December at the height of the global equity meltdown when investors became concerned about a global economic slowdown. The spread had been near 40 bps in October before the global stock market meltdown commenced.   Why is this metric so important? Because yield curve inversion is a classic signal that a recession is coming. The yield curve has inverted before each recession in the past 50 years; it has had one false signal in that 50-year time span. The economy has taken anywhere from 12 to 24 months to fall into a recession when the yield curve inverts. While U.S. and global equities have rallied strongly during January and February, U.S. and G7 interest rates remain suppressed as concerns remain about a global slowdown. Today’s Fed minutes will be very important and will be released at 11:00 PST. HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT: Evidence of a slowdown in global trade continues to be seen in almost all the major economies. Japan released its trade data for January and it was disappointing as exports declined much more than expected YoY by 8.4%, creating a much larger trade deficit. Japanese exports to China fell by 17% YoY which is evidence of a continued slowing of demand in the Chinese economy. The Japanese yen is slightly weaker today and has weakened nearly 2% since January 4.

If we can help you with any Foreign Exchange needs, please email foreignexchange@cnb.com or call (800) 447‑4133. Want to learn more about international finance, economics, and global events? Sign up for our other Foreign Exchange emails and videos!

Follow City National Bank on social media:

Investment and Insurance Products: • Are Not insured by the FDIC or any other federal government agency • Are Not deposits of or guaranteed by a Bank or any Bank Affiliate • May Lose Value This report is for general information and education only and was compiled from data and sources believed to be reliable. City National Bank does not warrant that it is accurate or complete. Opinions expressed and estimates or projections given are those of the authors as of the date of the report with no obligation to update or notify of inaccuracy or change. This report is not a recommendation or an offer or solicitation to buy or sell any financial instrument discussed. It is not specific investment advice. Financial instruments discussed may not be suitable for the reader. Readers must make independent investment decisions based on their own investment objectives and financial situations. Prices and financial instruments discussed are subject to change without notice. Instruments denominated in a foreign currency are subject to exchange rate and other risks. The Bank (and its clients or associated persons) may engage in transactions inconsistent with this report and may buy from or sell to clients or others the financial instruments discussed on a principal basis. Past performance is not an indication of future results. This report may not be reproduced, distributed or further published by any person without the written consent of City National Bank. Please cite source when quoting.

Unsubscribe from this list  |  Update email preferences This message has been sent to bank@banking.offers.report. Please do not reply to this email. To ensure the delivery of future emails, please add foreignexchange@emails.cnb.com to your email address book or safe sender list. Copyright ©2019 City National Bank – All Rights Reserved. 350 South Grand Avenue, 12th Floor, Los Angeles, CA 90071 City National Bank is a subsidiary of Royal Bank of Canada. TERMS & CONDITIONS  |  PRIVACY STATEMENT NMLSR ID# 536994 | City National Bank Member FDIC