Features

The charts that matter: a new hope?

The gap between yields on short and long-dated US bonds turned positive this week, after having briefly turned negative. John Stepek looks at how this affects the charts that matter most to the global economy.

Welcome back. Merryn and I won't have a chance to record a new podcast until early next week, but if you missed last week's, we talked all about negative bond yields and the end of the monetary system as we know it (among other things that are now out of date, such as shutting down Parliament). Check it out here.

Please don't miss the MoneyWeek Wealth Summit in November. With the state of the world right now, it promises to be one of the most informative and valuable ways to spend a Friday you could hope to have this year, and Merryn and I would like to see you there. It's in London on 22 November find out more here.

If you missed any of this week's Money Mornings, here are the links you need:

Monday: Here's why the idea of a bubble in passive investing is flawed

Tuesday: It looks as though we're heading for another general election

Wednesday: Gold is back here's the key price it needs to break through next

Thursday: Three important events you missed while Parliament squabbled yesterday

Friday: Believe it or not, markets have had a pretty good week

Currency Corner: What's next for the US dollar?

Subscribe: Get your first 12 issues of MoneyWeek for £12

Have you been watching our Money Minute videos? Let us know what you think. Drop us a line at editor@moneyweek.com (put "Money Minute" in the subject line) or contact me on Twitter at @John_Stepek.

Onto the charts. The yield curve isn't inverted any more (for a reminder on why the yield curve matters, here you go). In short, the gap between the yield on the ten-year US government bond and the yield on the two-year has gone back to being positive having briefly turned negative (in other words, it costs the US government more to borrow for ten years than for two, which is the normal course of things).

Trouble is, once the reversion has happened, it doesn't matter if it un-inverts. You've still got a pretty reliable indicator that a recession is coming. What does that mean? Well, again unfortunately, while it's a reliable indicator (as far as these things go, which is not terribly far), the recession can happen anything up to two years later. And meanwhile, the stockmarket may continue to rise for some time.

190907-MWU01-yields

(The gap between the yield on the ten-year US Treasury and that on the two-year, going back three months)

Gold (measured in dollar terms) fell back towards the end of the week as hopes for new trade talks between China and the US, plus pretty solid US economic data, boosted investors' hopes that a recession might not happen as early as they think.

190907-MWU02-gold

(Gold: three months)

The US dollar index a measure of the strength of the dollar against a basket of the currencies of its major trading partners surged then weakened. Again this is probably a "risk-on" trade (people buy US dollars when they're nervous, but they're happy to sell and invest in riskier climes when they're not).

190907-MWU03-usd

(DXY: three months)

Meanwhile, the number of Chinese yuan (or renminbi) you can get to the US dollar (USDCNY) remained above the 7.0 level but fell towards the end of the week as the US currency weakened a little.

190907-MWU04-usdcny

(Chinese yuan to the US dollar: three months)

As for ten-year yields on major developed-market bonds yields rose as bond prices fell, which is again, typical of "risk-on". Here's the US ten-year yield:

190907-MWU05-treasuries

(Ten-year US Treasury yield: three months)

And Japan:

190907-MWU05-jgb

(Ten-year Japanese government bond yield: three months)

And even Germany managed a rally (finally)...

190907-MWU06-bunds

(Ten-year Bund yield: three months)

Copper rebounded along with hopes of a trade deal.

190907-MWU07-copper

(Copper: three months)

The trade deal was also good for the Aussie dollar which rallied sharply, helped by the drop in the US dollar. News that house prices are rallying after a prolonged slump (due to lower interest rates) probably helped sentiment too.

190907-MWU08-aud

(Aussie dollar vs US dollar exchange rate: three months)

Cryptocurrency bitcoin had a good week too which does rather suggest it's not the digital gold substitute that lots of people are trying to bracket it as.

190907-MWU09-bitcoin

(Bitcoin: ten days)

US weekly jobless claims came in at 217,000. The four-week moving average edged higher to 216,250.

US stocks typically don't peak until after this four-week moving average has hit a low for the cycle, and a recession tends to follow about a year later (remember that this again, is from a tiny sample size, originally highlighted by David Rosenberg at Gluskin Sheff). The last low came about three months ago, at around 201,000.

This week's non-farm payrolls report sent out a few mixed signals. On the one hand, fewer jobs were added than expected. However, the percentage of people with jobs rose and wage inflation was also higher than expected. The combination of higher wages and fewer hires might suggest that the labour market is simply now so tight that employers are having real trouble filling positions.

190907-MWU10-jobless

(US jobless claims, four-week moving average: since January 2016)

The oil price (as measured by Brent crude, the international/European benchmark) rallied along with other risk assets.

190907-MWU11-oil

(Brent crude oil: three months)

Internet giant Amazon rallied strongly this week along with the wider market.

190907-MWU12-amazon

(Amazon: three months)

Electric car group Tesla was little changed.

190907-MWU13-tesla

(Tesla: three months)

Have a great weekend. (And if you haven't bought The Sceptical Investor yet, there's no time like the present).

Recommended

What escalating tension between Iran and the US means for oil prices
Global Economy

What escalating tension between Iran and the US means for oil prices

The tension between the US and Iran is unlikely to mean all-out war in the Middle East. But markets may be getting a little too complacent about its e…
6 Jan 2020
Rising output will keep a lid on the oil price
Oil

Rising output will keep a lid on the oil price

Oil exporters’ cartel Opec gave further encouragement to the bulls this month after agreeing to new production curbs.
20 Dec 2019
How long can the good times roll?
Economy

How long can the good times roll?

Despite all the doom and gloom that has dominated our headlines for most of 2019, Britain and most of the rest of the developing world is currently en…
19 Dec 2019
Brace yourself for pricier oil
Oil

Brace yourself for pricier oil

Global growth, and hence demand for oil, could surprise on the upside next year, leading to a bounce in the oil price.
29 Nov 2019

Most Popular

Here’s why you really should own at least some bitcoin
Bitcoin

Here’s why you really should own at least some bitcoin

While bitcoin is having a quiet year – at least in relative terms – its potential to become the default cash system for the internet is undiminished, …
16 Sep 2020
Will a second wave of Covid lead to another stockmarket crash?
Stockmarkets

Will a second wave of Covid lead to another stockmarket crash?

Can we expect to see another lockdown like in March, and what will that mean for your money? John Stepek explains.
18 Sep 2020
Central banks want politicians to take charge – but what will they do?
US Economy

Central banks want politicians to take charge – but what will they do?

The US Federal Reserve has come to the end of the road in terms of what it can do to accelerate any recovery, says John Stepek. It's over to the polit…
17 Sep 2020