The Weekly Strategy Report (May 21, 2018)
- As yield curves flattened globally over the last few years, warnings have increased proportionately that a flat yield curve foretells economic recession.
- While the yield curve in general is a powerful indicator, it is an inverted curve rather than a flattening curve that provides a powerful signal to de-risk. Yield curve flattening, a natural by-product of a rate hiking cycle, is common in the later stages of the business cycle.
- Yield curves have been distorted by quantitative easing (QE) and have been flatter than pure macro factors would predict, reducing but not eliminating the signalling power of the curve.
- Within our base case view of above trend growth in major developed markets and normalizing inflation, we see low risk that the yield curve inverts this year. As such, we maintain a moderately positive stock-bond view, with our preferred equity regions the U.S., emerging markets and Japan.
EXHIBIT 1: U.S. 3-month 10-year YIELD CURVE VS. S&P 500 PEAKS (WITH RECESSION SHADING)
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