Yield curve remains stable, despite declines in 10-year yields. The difference between 10-year and 2-year Treasuries, known as the yield curve, has remained stable since late December with declines in the 2-year yield approximately matching the decline in the 10-year. A stable curve on declining yields typically signals a negative assessment of the economy. The Fed may have been too aggressive for markets with its fourth hike of 2018, but a strong shift in messaging in January has calmed market fears. Still, the Fed’s recent dovish shift amid a backdrop of still-healthy economic growth underpins our expectation for the yield curve to steepen modestly over the rest of the year. The Fed will provide a new set of forecast and rate projections at its next meeting in March.
Dollar rebound erases 2019 weakness. Investors are shifting back into risk assets after U.S. lawmakers agreed “in principle” to avoid another government shutdown, and as expectations mount that the March 1 deadline for a trade deal will be extended. Treasury yields are rebounding, along with stocks, while the U.S. dollar is poised to snap an eight day win streak that saw the greenback recoup its year-to-date losses, which began on January 30th, the date the most recent Fed policy meeting adjourned. The more dovish tone from Chairman Jerome Powell would normally be expected to put downward pressure on the dollar, all else equal; but all else was clearly not equal. Adding to investor angst have been murmurs that U.S. firms may be headed for an earnings recession-we discuss out thoughts on corporate earnings in this week’s Weekly Market Commentary. All of which has spurred demand for safe-haven Treasuries, which much be purchased with dollars.
Bund yields flirt with negative territory. Germany’s benchmark bund yield is on the cusp of negative territory as Europe’s biggest economy battles economic weakness and slowing inflation. On the LPL Research blog today, we’ll dig into investors’ increased appetite globally for government debt (including Germany’s), and analyze what this could mean for U.S. Treasury yields’ path this year.
Monitoring the Week Ahead
- CPI Report (MoM, Jan)
- Eurozone Industrial Production (Dec)
- Japan GDP Report (Preliminary, Q4 2018)
- China Imports (Jan)
- China Exports (Jan)
- China Trade Balance (Jan)
- PPI Report (MoM, Jan)
- Initial Jobless Claims (Feb. 9)
- Germany GDP Report (Preliminary, Q4 2018)
- Eurozone GDP Report (Preliminary, Q4 2018)
- Japan Industrial Production (Dec)
- China CPI Report (Jan)
- China PPI Report (Jan)
- Retail Sales (MoM, Jan)
- Industrial Production (MoM, Jan); Cons: 0.2%, LP: 0.3%
- University of Michigan Sentiment Index (Preliminary, Feb); LP: 91.2
- Eurozone Trade Balance (Dec)
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