NationStates Jolt Archive

So today a flat/negative yield curve hit the stock markets, but what do you make of it? Will recession follow? Will the curve return back to normal soon?
Either I shall bet on falling markets and rising interest rates or on differences in the yields growing back and a resumtion of the rally in stocks.
Do you think the inversion is signifficant? What brought it about? The fear of rising interest rates or the verry opposite - trust in the feds ability to keep inflation in check over a long time in conjunction with trust in the government to get the deficit under controll?

The yield curve only inverted for about an hour.

Conventional wisdom says that a recession should be around the corner when the yield curve inverts. However, NO OTHER conventional indicator of recession seems to be rearing it's head. Unemployment is low and growth is strong.

Even as I am writing this, there is some talking head on NPR saying how this time an inverted curve may signal increased growth.

Maybe....but maybe not.

The yield curve only inverted for about an hour.

Conventional wisdom says that a recession should be around the corner when the yield curve inverts. However, NO OTHER conventional indicator of recession seems to be rearing it's head. Unemployment is low and growth is strong.

Even as I am writing this, there is some talking head on NPR saying how this time an inverted curve may signal increased growth.

Maybe....but maybe not.
Just the little I know about yield curves and their shapes leads me to believe you might need one or two months of inverted progress to signal a recession. That and some other bad indicators. We don't have the Fed acting like Volker did in '81, when he started lowering the federal funds rate.

You can't use the stock market as an indicator anyways - even disregarding the inherent irrationality of the average investor, it only represents a tiny fraction of the top echelon of an economy.

I'm not a fan of using it as any sort of indicator.

ok, it has not been inverted for a long time, but a negative slope is not "natural", so you would expect it to return to normal quickly, but the curve has been relatively flat for a very long time now, even greenspan was wondering about it.
that may signal, that everyone has great trust in the federal reserves ability to keep inflation and interest rates low and constant, this may be what the talking head on NPR was thinking. problem is ofcourse if everybody is expecting a devellopment, the opposite tends to happen.

No, it doesn't appear to mean anything. There are no real signs of an upcoming recession, even with high oil prices and the steady climb of the fed funds rate for an entire year. Unemployment is at new lows, payrolls are expanding strongly, and wages are growing again thanks to falling inflation.

I think it will be even less likely now that prices for oil are falling and Japan appears to be recovering.

The inversion is probably due to the high demand for Treasuries, especially 10-years from the Chinese and European central banks. This pushes down the yield on the 10-year artificially, since these levels of demand are considerably above normal.

You can't use the stock market as an indicator anyways - even disregarding the inherent irrationality of the average investor, it only represents a tiny fraction of the top echelon of an economy.

Correct. The performance of the market is sometimes artificially depressed in so-called secular bear markets, in which the performance of the market has little or no tie to the economy or the valuations of the companies traded. It's sometimes artificially inflated in secular bull markets as well, with the result being a bubble.

Overall, the stock market does little to predict anything. 2004 and 2005 have been extremely strong in terms of profit growth, M&A activity, and buybacks, but the indices are still below their levels in 2000 before the bubble burst. This year, the markets are only up a couple percent despite this overwhelmingly positive corporate environment.