The yield curve inversion has reared its ugly head again with the typical market jitters, but this time it is accompanied by a few “friends” that could prompt concern. As of today, the 3-month/10-year spread has a solidly negative relationship at 2.36% to 2.25%, respectively. This alone is not too notable, despite what some of the “talking heads” may lead you to think. I am skeptical of the research on this point since I think there are too many behavioral biases, externalities and other variables to effectively model causation. But, when it is accompanied by other stats pointing in the same direction I take notice.
What is worrisome about it this time? For the first time since 2016 Q4, the April ISM Purchasing Managers Index (PMI) has grown at its slowest level. I am a fan of the PMI and the May PMI is due on Monday, June 3. A continuation of this trend could be troublesome. It could very well be a short term blip, but it is continuing a softening trend we have seen since March. China, Mexico and Brexit pop up as the chief culprits influencing the stats; we are hopeful that market forces will help correct any imbalances, but it could take a while to adjust.
Another stat to take note of is the Conference Board Leading Economic Indicators (LEI). It continued to show increases for February, March and April, but could be setting up for a surprise in May. This stat covers many different aspects of the economy, including the impact of stock prices that could push the index down.
Market momentum has eased in May after a strong rally through April. A few technical barriers have been crossed, but we are still (just barely) over the 200-day moving average. A continuation of this trend is worrisome.
Thankfully, all is not lost! For one, the yield curve inversion is occurring with a general decline in rates. U.S. Treasury bonds are a safe haven investment around the globe, so when there are geopolitical hiccups, it is logical that U.S. Treasuries get bid up in a “flight to quality.” It certainly doesn’t hurt demand for U.S. treasuries that “negative” yielding sovereign debt still persists in large numbers around the Eurozone and elsewhere. Also, corporate and high yield bond spreads have weakened a bit in May but continue to get a bid, so stable bond markets give comfort that we are not entering a crisis stage.