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The Yield Curve Is Trying to Tell Us Something

An inversion means it’s time to start the recession clock – the only question is how long to wait.

The Yield Curve Is Trying to Tell Us Something

An inversion means it’s time to start the recession clock – the only question is how long to wait.

Inversion is never a good sign.

Photographer: Sean Gallup/Getty Images Europe

Today’s Agenda

Welcome to The Upside Down.
Photographer: Sean Gallup/Getty Images Europe

Yield Curve Starts the Recession Clock

Photographer: Sean Gallup/Getty Images Europe

Brace yourselves everybody, a recession is coming! Sometime in the next, uh, two years. Or less. Or more.

Earlier this week, interest rates on 3-year Treasury notes turned higher than 5-year rates for the first time since the dawn of the previous U.S. recession, back in 2007. This is called an inversion of the yield curve, or at least a small piece of the curve. The Big One will be when 2-year and 10-year Treasury rates swap places, and bond traders are doing their darnedest to make it happen soon, as Robert Burgess points out. That particular inversion has preceded every recession since the late 1970s. The thing is, as Bloomberg economist Michael McDonough notes in this chart, the yield curve is kind of a loooong leading indicator:

So maybe don’t head for your bomb shelter just yet. But it’s worth asking why the yield curve is such an uncanny predictor of recessions (and no, it’s probably not different this time). Karl W. Smith suggests the market is pricing in lower Fed rates in the future, either to end a recession or to prevent one. A recession isn’t destiny, in other words: The Fed could respond to the yield curve’s signal by cutting rates to head off the recession. But this would require a level of forward thinking the Fed hasn’t shown in the past. Usually it just keeps raising rates, yield curve be damned, and it may be about to make the same mistake, Karl writes.

Another big recession indicator is the recent weakness in housing. This, along with growing volatility in stocks, could help explain why high-income Americans are more pessimistic about the economy than low and middle earners these days – an unusual situation, as Danielle DiMartino Booth notes. High earners do the bulk of consumer spending, which is the life blood of the economy. If they cut back, then a recession becomes more likely, Danielle writes.

Housing weakness was one reason Rick Rieder, BlackRock Inc.’s chief investment officer of global fixed income, didn’t believe it when Fed Chairman Jay Powell suggested in October the central bank was nowhere near done hiking, Brian Chappatta writes. The market has caught up to Rieder’s forecast of a Fed pause – though the pause may come too late. 

Further Credit-Market Reading: Once again, Treasuries are proving they’re a safe haven from stocks. – Brian Chappatta 

Mueller’s Dark Materials

Special counsel Robert Mueller has been extracting info from President Donald Trump’s former national security adviser Michael Flynn for more than a year now, and last night he summed up his work product with a court filing that was filled with unreadable black lines. Redacted, for now, are all the juicy details. But no news is not good news for Trump or First Son-in-Law Jared Kushner, writes Tim O’Brien. From what we know of what Flynn knows, what’s buried beneath those black lines could be damning information about Trump and Kushner’s business dealings and possible favor-trading with Russia. Read the whole thing.

Brexit’s a Flaming Clown Car

Theresa May did everything in her power to keep parliament from having any say over Brexit, and now she has lost control of the process altogether, writes Therese Raphael. That might seem to be for the best, given how spectacularly poorly May has handled things. But Therese says the U.K. right now is a speeding car with a bunch of people fighting for the wheel. Oh, and there’s a cliff. And the car is on fire. And parliament has shown it can make huge mistakes, as when it hastily triggered Article 50, Therese notes. Maybe it’s at least a little wiser now?

Further Brexit Reading: Brexit stress is taking a measurable toll on the psyche and physical health of Brits. – Mark Buchanan 

Macron’s Dilemma

Speaking of things on fire, French President Emmanuel Macron has his own problems across the Channel. He had to back down from a planned fuel-tax hike after days of fiery, dangerous protests (which were, to be fair, about more than just fuel taxes). Still, Macron is right to want to raise fuel taxes and shouldn’t give up on the idea, Bloomberg’s editorial board writes. But he should use a promised delay to figure out how to craft and pitch his plan better.

Bonus Editorial: With its aging population, Japan is smartly starting to encourage more immigration. But it’s not going far enough – it also needs to reshape public opinion of immigrants, or its reforms will make no difference. 

Putin Pushes His Luck

Maybe Vladimir Putin has gotten a little complacent, after helping Trump win in 2016 and then watching him trash the alliances Putin most wanted him to trash. In October, Trump announced he was getting out of the 1987 Intermediate Range Nuclear Forces treaty, which seemed to be the latest Trump abandonment of global diplomacy. But then Putin this week threatened to violate the INF in response, and a weird thing happened: Everybody in NATO joined the U.S. to point out that Russia has been a serial violator of that treaty, Eli Lake writes. Whoops! Putin has somehow managed to inspire NATO to rediscover its unity.

Further Russia Reading:

Telltale Charts

Trump calls himself Tariff Man, but he doesn’t seem to know how tariffs work, or who they would hurt, writes Noah Smith.

Emerging markets – including China – now seem like a safer bet than the U.S., notes Shuli Ren.

Further Reading

Lindsey Graham wants regime change in Saudi Arabia. He may be going too far, but he’s right to push for a sharper response to Jamal Khashoggi’s murder. – Eli Lake 

One good way for Qatar to annoy Saudi Arabia would be to not leave the Gulf Cooperation Council. – Bobby Ghosh 

Shouldn’t have printed all those “Avenatti 2020” buttons; Democrats have already started winnowing the 2020 presidential field. – Jonathan Bernstein 

Under fire from Trump about high drug prices, CVS Health Corp. is tweaking its business model, but just barely. – Max Nisen

Digital advertising is long overdue for an antitrust review. – Leonid Bershidsky 

Europe’s semiconductor sector needs to make some deals, but Xi Jinping is making them harder to do. – Alex Webb 


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Note: Please send french fries, suggestions and kicker ideas to Mark Gongloff at

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