Chart of the Month
The slope of the Treasury curve between 5 years and 30 years, chosen to abstract from short-term interest rate changes, has correctly anticipated a majority of turns in US manufacturing activity. However, it called the end of the 2000s expansion 2 years early and has had a patchy record in the post-QE period. While activity is running well above the levels projected by the yield curve slope in 2019-20, this follows the under-achievement in 2011-15.
The collapse in the Baltic Dry Index, an average of freight rate for size-specific shipping over 20 international trade routes, reflects the sharp tactical contraction of Chinese imports at the end of last year. Some regard it as a timely indicator of global activity, but its message is negated by the copper-gold price ratio, with which it has usually enjoyed a strong correlation. The rebound in copper prices is built on strong fundamentals – a 65 per cent drop in global exchange-traded inventories and a 33 per cent annual increase in Indian consumption – and may offer the better guide.
Over the past year there has been an animated debate concerning the 30-year downtrend in long-term US Treasury bond yields: has the trend been broken and should we expect higher yields in future? Elevated nominal GDP growth in 2018, coupled with the Fed’s quantitative tightening and the additional primary debt issuance (to fund annual US deficits of more than a trillion Dollars in the next decade), suggest that long-term rates should rise. According to the NY Fed, There has been a significant increase in primary dealers’ inventories of US Treasuries in the second half of last year. If interest rates start to rise again in the coming months, will this increase be reversed?
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