Double, double, toil and trouble; Fire burn and cauldron bubble.
...By the pricking of my thumbs, Something wicked this way comes.
Macbeth, Act IV, Scene 1, 1606
Something happened at the end of 2018. We moved from a country confident in its outlook, to one with profound questions about the future.
As indicated by the comparative Yield Curves on the prior page, we made a tangible shift in the fourth quarter of 2018. We finally entered the era of the dreaded "Negative Yield Curve." For some this is only a mild curiosity, but for those who manage money, this has potentially profound implications. In late December, the 2-3, 2-5 yield relationships went negative. In fact, as you can see in the Curve on the above graphics, everything from the One Year through the Seven Year went negative. Although the 2-10 (the classic Curve) continued to maintain 15 bp's of spread, a reversal in this area seems all but certain, most likely occurring within the next 6 to 9 months.
This is significant because a negative Yield Curve has preceded every post-war recession, and this history goes back much further. The implication going forward is that this signal conflicts with the Fed's official outlook. The Fed sees a reduced, but comfortable in their eyes, growth rate of 2.25 - 2.50% GDP in 2019 and 2.00 - 2.25% in 2020.
They see this slowdown as being a healthy development which should lead to a slight increase in the unemployment Rate, which they see as being the result of an increased participation rate. All of which will contribute to dampening inflationary pressures, which they seem to see as their greatest obstacle to conomic stability. This, of course, is diametrically opposed to the Market's outlook for reduced inflationary expectations, fully realizing that the Fed has failed to meet their inflationary targets for at least the last six of seven years.
This sets the stage for a tumultuous 2019, which promises to be reach Shakespearian proportions...
Click here to read more: General_Economic_Outlook_2019-2020_Hybarger.pdf