Pro Perspectives 8/27/19

August 27, 2019

Yesterday, we talked about the two key spots to watch, as we step through the week:  the Chinese yuan and the yield curve.

Today, both continued to disrupt any sense of calm that might have developed following the weekend's G7 meetings. 

The Chinese walked the yuan lower, again, overnight.  The yuan is 4.2% weaker relative to the dollar, since the beginning of this month!   

As you can see in the chart, the yuan is the weakest since 2008 (the orange line going up represents a weaker yuan, stronger U.S. dollar).  At this pace, by year-end we would see a return to the value of the peg (8.27 yuan/dollar).  The peg held from 1997-2005.

The yield curve

Remember, we've had an inversion of the 3-month treasury to 10-year treasury since May.  But the markets didn't go haywire until the 2-year/10-year spread briefly went negative on August 14th.  Yesterday was the first day, it spent considerable time "inverted."  And today, it plunged as low as negative five basis points.  Bottom line, the "recession signal" that sends fear is now clearly flashing.  

Still, unlike past yield curve inversions, we have global central banks that have pinned down the long-end of the curve (i.e. distortion).  People in this business don't like to say "this time is different."  But that makes, this time different. 

What the yield curve is doing, however, is exposing the Fed for bad policy — for aggressively moving short term rates UP, while the world is still dealing with post-crisis deflationary forces (which is why the central banks are still involved in the long-end of the curve). 

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