The normalisation that never was…. – The Property Chronicle
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The normalisation that never was…. There may be some factors causing the yield curve to be flatter in this cycle than previously

The Economist

Despite stronger economic growth in Q2 2018, further Fed tightening and a bearish consensus that US interest rates would go substantially higher in 2018/19, financial markets now signal concern about weaker economic growth and inflation. This is shown in (1) the flattening of the US yield curve (10 yr – 2yr yields; see Chart 1), (2) stable inflation breakevens or expectations, (3) a modest de-rating of the US equity market, and (4) flat to weaker equity market performance globally in 2018 v 2017. Forecasts of a decisive break above 3% in 10 year Treasury yields have also been confounded and once again, the financial market consensus on higher growth, inflation and “ normalisation “ of interest rates has been mistaken.  It is still too early to declare a final outcome, but the failure of those economies further advanced in the economic cycle – notably the US – to show more than modest late-cycle capacity strains and inflation pressures may have dealt the final blow to those expecting interest rates to “ normalise” at pre-GFC levels. 

Since an inverted US yield curve has been a reliable leading indicator of US recessions in 8 of the last 9 business cycles, financial markets are also paying heed to the curve flattening of recent months. This has left the US yield curve at its flattest since 2007 (Chart 1)- with a positive gradient of 23bp –  when it inverted 12 months before the deep recession of 2008/09. 

The Economist

About Robin Marshall

Robin Marshall is currently a Partner and Fixed Income Strategist, at Smith and Williamson investment Management, London. He also advises the Smith and Williamson Global Inflation Linked Bond Fund. He was formerly Managing Director, Economic and Policy Research, at JPMorgan Chase, London, and Chief Economist, Europe, Africa and Middle East. After graduating from Oxford University, Mr Marshall completed the M.Phil in Economics, in Oxford, and lectured in Economics at the University of London.

Articles by Robin Marshall

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