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The difference between the yield on 10-year Treasury notes went further below the yield on 3-month bills Wednesday. The difference is the most since 2007 and suggests that the inverted yield curve may not be going away.
Why it matters: Since the 1970s, an inverted yield curve has preceded every U.S. recession. However, economists, fund managers and other experts have been waving off the inversion's importance so far this year in a way that's eerily familiar.
What they said: When the yield curve inverted in January 2006, in much the way it has this year, former Fed Chair Ben Bernanke said not to worry. "In previous episodes when an inverted yield curve was followed by recession, the level of interest rates was quite high, consistent with considerable financial restraint," he said in a speech in March 2006. "This time, both short- and long-term interest rates — in nominal and real terms — are relatively low by historical standards."
It wasn't just 2006 when experts were sure things were different this time.
"We said the same thing in 2000," Bank of America trading strategist Gerald Lucas quipped to the FT in January 2006, while noting that "the inversion was the result of scarcity value at the long end of the curve to do with Treasury buybacks."
Be smart: The experts also insisted that economic data was strong and the usual recession warnings signs — other than the inverting yield curve — simply weren't there.
"I think it sometimes portends a recession, sometimes not," said Marshall E. Blume, a finance and management professor at the University of Pennsylvania's Wharton School. This time, it probably does not, he added in 2006.
The yield curve inversion is an indicator of conditions that lead to recessions, not a cause, and the timing between an inverted curve and a recession has varied significantly over the last 50 years.
Details: The 10-year/3-month yield curve inverted in mid-January 2006 and the U.S. didn't enter recession until December 2007. During that time the curve briefly righted itself and then inverted again in July 2006 and remained that way until late May 2007.
There was more blood on Wall Street Wednesday. Stocks and other risky assets fell while traders piled into safe-haven bonds.
What they're saying: "The 2019 rally has been driven by 1) A dovish pivot by the Fed (no more hikes), 2) An expected U.S.-China trade deal, 3) Stable U.S. and global economic growth and 4) Better-than-feared earnings. Three of those four factors got significantly worse last week," said market analyst Tom Essaye in his Sevens Report newsletter.
Wednesday's sell-off pulled equity markets around the globe lower, with the notable exception of Latin America.
Why it matters: Typically a proxy for investor expectations of the neighboring U.S. or major trading partner China, Latin America's gains were led by Colombia's Colcap index. The Colcap was the world's top performing stock market from January to late March, up more than 30% at its peak.
U.S. consumers will actually pay less in tariff penalties or taxes with the imposition of 25% tariffs on Chinese goods, but they'll pay a lot more overall, according to new research from the New York Fed.
The higher tariff rate of 25% will cost American consumers more than $100 billion a year. Most of that loss will come from the deadweight loss of consumers buying more expensive, or less efficient, products because of the tariffs.
The N.Y. Fed's Mary Amiti, Stephen J. Redding, and David E. Weinstein explain:
"[T]he 10 percent tariffs on Chinese imports might cause some firms to switch their sourcing of products from a Chinese firm offering goods for $100 a unit to a less efficient Vietnamese firm offering the product for $109. In this case, the cost to the importer has risen by nine dollars, but there is no offsetting tariff revenue being paid to the government. This tariff-induced shift in supply chains is therefore called a deadweight or efficiency loss."
Boeing CEO Dennis Muilenburg apologized Wednesday night to the families of the 346 people who died in the two 737 MAX 8 jet crashes that occurred within a 5-month period.
It was the first time Muilenburg made an unqualified apology to crash victims, and it represents a turning point in company strategy.
Why it matters to the market: Boeing's stock has fallen more than 17% since the second crash on March 10 and resulting global ban by regulators. There has been little good news since.
Between the lines: WSJ reported yesterday that "some MAX customers may seek to delay deliveries of their jets further because they have missed some or all of the busy summer flying season while other airlines may want their aircraft earlier than scheduled."