Inverted sovereign yield curves are generally bad news. And China’s inverted yield curve is no different. The 5Y to 10Y segment of China’s sovereign curve has inverted … again.
But before anyone gets hysterical, the rest of China’s sovereign curve is upward sloping like the USA (blue for China, green for the USA).
For comparison sake, I am including the mac-daddy of curve inversion: Venezuela (red line). Their 3Y sovereign yield is a gut-wrenching 58% while their 20Y yield is lower at 22%. And their 2,712.88% annual inflation rate.
The housing construction numbers for September were not great. 1-unit detached starts declined -4.60% while 5+ unit starts (multifamily) declined -6.23%.
Permits were off for 5+ unit (multifamily) at -17.43% while 1 unit permits rose 2.38% in September.
As a reminder, The Federal Reserve dropped their target rate as a result of the 2001 recession and 1-unit starts took off. Construction was so hot that The Fed had to raise their start rate to cool-off the construction bubble. Rather than cool-off the construction bubble, The Fed sent it into deep freeze.
Alas, there wasn’t a Fed Funds rate reaction during the housing bubble, but there appears to be a negative reaction to multifamily (5+ unit) starts since The Fed began jacking up their target rate.
And with an 84% implied probability of a December rate hike, we should watch starts and permits carefully over the next couple of months.
And here is the path of future rate hikes (forward curve). As Samuel L Jackson said in Jurassic Park, “Hold on to your butts.”
The US Treasury curve slope (30Y-5Y) continues to flatten and has just hit the low point since mid-November 2007, nearly a year before The Fed’s annoucement of QE1 (their first round of asset purchases).
And as of Q2 2017, M2 Money Velocity has sunk to its all-time time low.
Here is photo of The Fed announcing their QE1 asset purchase program.
And here is The Fed signalling a rate increase at their December FOMC meeting.
The persistent flattening of the Treasury yield curve appears to still have legs, and that may be a sign of economic trouble ahead. On Wednesday, the minutes of the Federal Reserve’s September meeting revealed policy makers’ resolve to stick to their tightening path. The difference between five- and 30-year yields fell below 93 basis points, near the lowest since the start of the last recession. Five-year Treasury notes are among the most sensitive to Fed policy.
And since 1992, the 30Y-5Y curve slope is deteriorating as if the US is approaching another recession.
With The Fed talking about raising their target rate in December, is this the end of The Fed’s Snake Oil? Or just the beginning of QE4?