ANZ Wealth’s analysis suggests a moderation in economic and earnings growth is in train in the US given economic tightening measures put in place to date from the US Federal Reserve.
The Fed will be the key to how this story ends.
The “yield curve” shows the difference in the compensation investors are getting for choosing to buy shorter or longer-term debt. Investors generally want more for locking away their money for a longer time period due to the greater uncertainty that comes with a longer time frame. So yield curves usually slope upwards.
A yield curve goes flat when the premium - or spread - for longer-term bonds drops to zero. This happens when we see the rate on a 10-year bond as no different as the rate on shorter term securities, typically a cash rate or a two-year bond. If the spread turns negative, the curve is ‘inverted’.
The yield curve is seen by many to be the most reliable predictor of the economic outlook. However, the lead time is long (typically around 18 months) and can be variable, sometimes raising doubts whether its forecasting track record will continue to hold.
In many cases it’s more than just whether the yield curve is inverted. The yield curve’s accuracy is quite amazing: the degree of steepness of the curve correlates with the pace of growth, so a flatter curve indicates slower growth and a steeper curve means a faster pace. Not surprisingly it also closely correlates with earnings on the US market.