Does the Yield Curve ever lie?

Recession Watch – Yield Curves Can Predict Future Crises, But You Have To Focus More on Curvature and Term Premia Than SlopeThis report argues that the yield curve slope, by itself, is not a robust predictor of future recessions. Other yield curve parameters need to be taken into account and, specifically, the size and position of the curvature hump in the term structure. In other words, we emphasise curvature and, by implication, the importance of term premia. Not only have term premia recently fallen in size – so indicating greater demand for ‘safe’ assets by investors – but their distribution has become more positively skewed, which has been a better predictor of upcoming recession than the simple yield curve slope. The implication is that the US Fed’s slated future ‘forward guidance’ path may be too aggressive.

Re-Assessing Emerging Markets: What Now?

As Global Liquidity conditions tighten further, we accept that the next few months will prove more challenging for Emerging Markets. Credit is a particular problem and the downside risk is that EM debt spreads could add a further 200bp versus US Treasuries. However, a positive note is that EM domestic fundamentals look far better than during previous crisis periods. In particular, net capital inflows appear surprisingly firm in contrast to recent Press reports. In sum, the EM outlook is poor largely because of external factors, but domestically it does not look a disaster.See our latest published research, Global View Re-Assessing Emerging Markets: What Now?July 2018Please find either a link to our website, or an email attachment.  For further information, or to change user options, please contact us at
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Liquidity is being drained fast...

The Tide Is Going Out…FastHaving previously warned of gathering problems from Q2, the economic and financial news flow is getting worse not better, and we believe asset markets are increasingly vulnerable to a meaningful shake-out. Risk appetite levels remain elevated and yield curves are flattening against a backdrop of fast tightening Global Liquidity. Not only are the two critical channels – Central Bank liquidity and cross-border flows – in retreat, but China, which dominates the pool of World savings, is now halting their recycling back into Western markets.

Red Alert

Red Alert for Markets? PBoC Watching Signals Danger AheadNever say never in financial markets. On paper, China’s PBoC has few reasons to tighten in 2018, but latest data show the People’s Bank squeezing moderately. This may be a temporary blip, but the huge size and influence of the PBoC makes it a critical factor to watch.

Why Asia Really Is Different This Time

There is an ever more distinct Asian financial cycle. Structural economic changes are altering the shape of the World economy, largely, in recognition of China’s increasingly dominant role. Policy-makers are responding. We do not mean by this the latest reactive moves by US President Trump, rather the longer-term strategic adjustments being implemented by Asian regional policy-makers. Foremost are the implied shift by Japan towards Yen-targeting and the suggestion that China has stopped building forex reserves. If we are correct, these moves prospectively represent the biggest policy changes in Asia for three-decades.

Emerging Market Crises - When to Push the Panic Button?

We continue to be more concerned by developments in the core economies than in EMs, but we also acknowledge that when the liquidity tide goes out, then EMs can look vulnerable. In this report, we argue three things: (1) every EM crisis is first-and-foremost a currency crisis; (2) EM fundamentals appear far stronger than in past EM currency crises, and (3) the Chinese economy is now more important than the US economy to the fortunes of EMs. Although we remain negative about global markets, we are more upbeat about medium-term EM prospects and conclude that the latest shake-out is nothing like 1997, 2001 nor 2008. Therefore, buying into EM weakness makes sense.

What Is Happening to US 'Safe Assets' - Part 1: US Treasuries

The background of rising Treasury yields and flattening yield curves rarely leads to good economic outcomes. We show, in this report, that the currently flat US yield curve reflects poor domestic liquidity conditions. This, in turn, is leading investors to move deeper into already expensive ‘safe’ assets, and the resulting skewed distribution of term premia warns of slowing US economic activity over the next 6-12 months. We argue that the skewness of the distribution of term premia is far better at predicting future economic slowdown than the flatness of the yield curve slope. Slower economic activity should ultimately cap the rise in bond yields. We continue to see 3.5% yields on 10-year Treasuries tested this year, but with the growing odds of a bond rally thereafter. The FOMC project seven policy rate rises to end-2020: we foresee, at most, three, largely because US liquidity is already very tight. Fed Funds may reach 2½% and stop.