First, look at futures as of today (with the decline looking unabated):
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Category Archives: financial markets
Term Spreads in 2018: An Annotated History
Today, the 10 year-3 month spread ended below 1%, in the absence of safe haven effects. The 10 year-2 year spread ended at 0.35%.
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Explaining the Soybean Selloff: Ag Conditions, the Dollar, or Tariff Fears?
Spreads Watch
In all the excitement between the Italian crisis and the US lashing out with tariffs to be levied against our allies, it was easy to overlook this event:
Figure 1: Ten year constant maturity Treasury minus three month Treasury bill yield spread on secondary market (blue), and ten year minus two year yield spread (green), both daily, %. Last observation is 6/1. Source: Federal Reserve via FRED, Bloomberg, and author’s calculations.
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Recession 2020?
Goldman Sachs (Hatzius et al., May 24):
Ongoing rate hikes are likely to tighten financial conditions, at least gradually, and we expect growth to slow to a trend pace through 2019 even with fiscal stimulus still helping. From 2020, when the fiscal impulse ends, the risk of recession looks set to rise, but the lack of cyclical excesses in borrowing and spending suggest that an outright contraction is far from a foregone conclusion—so long as Fed officials manage to prevent a big overheating.
Guest Contribution: “An Economic Platform for the Democrats”
Today, we present a guest post written by Jeffrey Frankel, Harpel Professor at Harvard’s Kennedy School of Government, and formerly a member of the White House Council of Economic Advisers. An earlier version appeared in Project Syndicate.
Long Horizon Uncovered Interest Parity, Updated
About twenty years ago, while visiting the Research Department of the IMF, Guy Meredith poked his head in my office and wondered aloud whether interest differentials could reliably predict (in the right direction) subsequent exchange rate changes at horizons of three to five years. The resulting paper led in turn to production of this graph:
Figure 1: Panel beta coefficients at different horizons. Notes: up to 12 months, panel estimates for 6 currencies against US$, euro deposit rates, 1980Q1-2000Q4; 3-year results are zero-coupon yields, 1976Q1-1999Q2; 5 and 10 years, constant yields to maturity, 1980Q1-2000Q4 and 1983Q1-2000Q4 (last observation corresponds to exchange rate data). Source: Chinn (2006).
Maybe We Will Get That Crowding Out That Rep. Paul Ryan Feared
Remember?
“Borrowing and spending by the public sector will crowd out investment and growth in the private sector.” Paul Ryan, “Path to Prosperity” (April 2012).
How Many Times Have the 10y2y and 10y3m Spreads Concurrently Broken the 1% and 0.5% Thresholds w/o Subsequent Recession?
If one uses a three year window, it’s three times: February, 1986, May 1995, September 1997. Three other times, a recession follows.
The last time around — when people were saying “this time is different” — was May 2005. Inversion occurred in February 2006 (and in November 2006, skepticism of impending recession). The recession is dated by NBER as starting in December 2007.
For additional discussion of the implications of a flattening yield curve, see Michael Klein’s EconoFact article, and (for cross country empirics) Chinn and Kucko (2015).
Guest Contribution: “The ECB’s Strong Euro Problem”
Today, we are fortunate to present a guest contribution written by Ashoka Mody, Charles and Marie Visiting Professor in International Economic Policy, Woodrow Wilson School, Princeton University. Previously, he was Deputy Director in the International Monetary Fund’s Research and European Departments.
The euro has appreciated 10 percent against the Swiss franc (CHF) over the past year. The U.S. dollar and the Japanese yen have not made similar gains vis-à-vis the franc. Tracking the franc’s movements relative to the major currencies gives an unusual window onto the deflation-fighting credentials of the world’s major central banks. It illustrates, in particular, the European Central Bank’s half-hearted efforts to fight the risk of price deflation. Financial markets have come to believe that the ECB will prematurely tighten monetary policy: hence, despite brief episodes of depreciation, the euro will tend to stay strong, hurting economic prospects in several eurozone member countries.