The yield curve is trying to tell us something

Bloomberg.- 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.

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