As Fed Says on Track, Narrowing Yield Curve Could Complicate Debate

Federal Reserve

What exactly is a yield curve, and why is it inverting?

The narrowing on December 3 was driven by both a rise in yields on the two-year Treasury, and a decline in the 10-year, which since last week has struggled to stay above 3 percent.

"The market decline in the US overnight and the flattening of the yield curve reflect that economic growth momentum is taking over as the primary concern for investors", Tai Hui, a strategist at J.P. Morgan Asset Management told clients. "You have worries about growth". "Keep it simple. Quantitative Tightening is bad for stocks". The euro was 0.11 percent lower. Fed Chairman Jerome Powell was scheduled to testify on Wednesday to a congressional Joint Economic Committee, but the hearing was postponed because of a national day of mourning for US President George H.W. Bush, who died on Friday.

The Australian dollar, viewed as a barometer of Chinese growth, gave up early gains to trade 0.26 percent lower.

On Monday, stock markets around the world got some relief after Washington and Beijing agreed to temporarily end their trade war during talks at the G20 summit in Argentina.

German 10-year yields are also being pushed down by domestic concerns, Commerzbank's Rieger said, with European growth indicators sagging and Italian political concerns rumbling on in the background. They kind of promised and the markets would get scared if they flipped.

LONDON, Dec 5 (Reuters) - Global stocks tumbled to one-week lows on Wednesday, as declines by long-dated US bond yields and a renewal of trade concerns stoked fears of a downturn in the United States, the world's largest economy.

Additionally, US President Donald Trump on Tuesday warned he would revert to tariffs if the two sides could not resolve their differences. "But if not remember, I am a Tariff Man".

What is a yield curve?

The two-year, 10-year yield curve is a key focus for investors as an inversion is seen as predictor of a U.S. recession. The Fed may try to reassure markets that the economy is doing well and that it is not anxious by continuing with their planned rate hike of a 25 basis points or they may single a delay of the hike. Late in the day, the two-year yield also dropped below the five-year's, with the gap at negative 0.5 basis point heading into the evening. I'm doubtful. Look for the Fed to skip this rate hike and reassess after the new year.

Global equities have been shaken as a flattening US Treasury yield curve - a result of a steep fall in longer-dated yields - fanned recession jitters and as US-China trade conflict woes resurfaced after a temporary lull.

The pound was little changed at $1.2717 having touched a 17-month low of $1.2659, rattled by Brexit setbacks in parliament.

Oil prices pared some gains as fears flared that demand would stall due to a trade war between the U.S. and China, and that Russian Federation remained a stumbling block to a deal to cut global crude supply. A year ago, the cushion was at 0.62 percentage points.

USA crude futures were down 0.8 per cent at $52.82 per barrel.

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