Yield curves in the US and the UK inverted on Wednesday amid fresh signs that the global economy is cracking under pressure.
As European bonds rallied following confirmation that German output contracted in Q2, both countries saw inversions in their respective 2s10s.
This comes on the heels of lackluster activity data out of China, where industrial output grew at the slowest pace in 17 years in July, underscoring the malaise gripping the world’s second-largest economy.
Meanwhile, 30-year Treasury yields touched a record low of 2.0669%.
Coming off a Tuesday session defined by (likely misplaced) trade optimism, it looks as though growth concerns will be front and center again, as well they should be. After all, Tuesday’s news on the tariffs was little more than a can-kicking exercise.
“Positive interpretations of today’s news don’t ring true to us”, Morgan Stanley’s Michael Zezas remarked, adding that “we do not think it meaningfully changes the uncertainty facing corporate decision-makers regarding investment”.
That’s correct. It also doesn’t change the uncertainty facing investors “regarding investment”, at a time when global growth and trade continue to decelerate thanks in no small part to the ongoing plunge down the protectionist rabbit hole. Throw in ascendant nationalism on the political front and you’ve got a recipe for a downturn.
The inversions are a clear sign that the market is beginning to buy into the “policy impotence” story. The dreaded “quantitative failure” is knocking at the door.
As ever, the worry is that monetary policymakers simply do not have the capacity to reflate this time around and that fiscal policy will either be too late or not coordinated enough to make a dent.