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Mar 15, 2018


The Wall Street Journal

Yield Curve Once Again Sends Dour Signal on Economic Growth

By Ben Eisen
Morning MoneyBeat is the Journal’s pre-market primer. To receive the newsletter via email, click here.
Market Snap at 03/15/2018 08:16:04 AM ET
S&P 500 Futures 0.05%
DJIA Futures 0.19%
U.S. 10 Year -0/32
WSJ Dollar Index 0.04%
Crude Oil 0.54%
Gold -0.23%
FTSE 100 0.12%
Nikkei 225 0.12%
DAX 0.36%
Hang Seng 0.34%
CAC 40 0.37%
Shanghai -0.01%

Overnight Developments

  • Stock markets wavered between small gains and losses amid tensions surrounding U.S. trade tariffs. S&P futures recently pointed to an opening gain of 0.04%.
  • The Stoxx Europe 600 was flat in late morning trading.
  • Earlier, Japan’s Nikkei 225 closed up 0.1%, and Hong Kong’s Hang Seng was 0.3% higher.
  • The Breakfast Briefing

    A bond market barometer that briefly suggested growth was perking up has reversed course.
    The so-called yield curve, typically calculated by measuring the differential between short- and long-term Treasury yields, has been flattening in the last few weeks. Long-term yields have fallen in response to tempered expectations for growth and inflation, even as short-term rates extend their months-long rise.
    The differential between the two-year yield and 10-year yield on Wednesday shrank to 0.55 percentage point, the smallest since Jan. 26, coincidentally the day of the S&P 500's last record high, Tradeweb data show. That was near its January low, which had been the lowest in a decade.
    The yield curve flattened this week as long-term yields fell after a slew of lackluster economic data. Retail sales slipped 0.1% in February, their third straight monthly decline, data showed Wednesday. And data on consumer and business prices showed inflation pressures remain modest.
    Investors watch the yield curve because it can signal that the economy is speeding up when it steepens. It can show the opposite when it flattens. And when short-term Treasurys yield more than their long-term counterparts, it signals that a recession is coming.
    The yield curve also influences portions of the stock market -- lifting banks and financial firms when it steepens and pushing up utilities when it flattens. On Wednesday as the curve flattened, the S&P 500 utilities sectors outperformed the benchmark, while the financial sector underperformed.
    Rising yields this year had made the yield curve steeper throughout parts of the winter, but recent economic data has dampened those expectations. At the beginning of this month, the Federal Reserve Bank of Atlanta's real-time GDP tracker projected the U.S. growing at a 3.5% annual pace in the first three months of the year, but by Wednesday, it had fallen to 1.9%.
    Though some have recently questioned the curve's forecasting power, many say it still offers a reliable signal.
    "Periods with an inverted yield curve are reliably followed by economic slowdowns and almost always by a recession," said Federal Reserve Bank of San Francisco economists, in a research note earlier this month.
    Are you worried about the flattening yield curve? Let the author know your thoughts at

    Key Events

    8:30 a.m.: Jobless Claims [Prior: 231,000; Consensus: 229,000]
    The number of Americans filing applications for new unemployment benefits is expected to have slipped last week. The measure recently fell to the lowest level since 1969, a sign of the strength of the job market.
    8:30 a.m.: Philadelphia Fed Business Outlook Survey for March [Prior: 25.8; Consensus: 23]
    The Federal Reserve Bank of Philadelphia's index of business activity for factories in the region is expected to have moderated this month after a bigger-than-expected increase in February. The index has been in expansionary territory since 2016 as the broader manufacturing sector has strengthened.
    8:30 a.m.: Empire State Manufacturing Survey for March [Prior: 13.1; Consensus: 15]
    New York manufacturers are expected to report conditions improved this month after the index fell for four consecutive months. Despite the recent softening, the index has remained at a level indicating robust growth.
    8:30 a.m.: Import and Export Prices for February [Prior Import: 1%; Consensus Import: 0.3%; Prior Export: 0.8%; Consensus Export: 0.3%]
    Import and export price growth are expected to moderate in February after bigger-than-expected increases the month before. Investors and policymakers see import prices as a gauge of inflation pressures.
    10:00 a.m.: Housing Market Index for March [Prior: 72; Consensus: 72]
    A gauge of U.S. home-builder confidence is expected to remain unchanged for a second consecutive month in March. The index closed out 2017 at its its highest level in more than 18 years amid the housing market's strength.
    10:30 a.m.: EIA Natural Gas Report
    Analysts expect data to show that stockpiles of natural gas declined by more than usual for this time of year. Storage levels are seen to have fallen by 99.09 billion cubic feet of gas during the week ended March 9, according to the average forecast of 11 analysts, brokers and traders.

    Stocks to Watch

    Boeing—Down 0.1%: The aerospace giant has fallen 6.8% this week with investors worried about the impact of U.S. steel and aluminum tariffs on manufacturers and possible retaliation from other countries. Boeing's 85% rise in the past year has helped propel major stock indexes in recent months.
    Mattel—Down 0.6%; and Hasbro—Down 0.9%: Toys ‘R’ Us, one of the largest sellers of toys made by Mattel and Hasbro, told employees it will sell or close all its U.S. stores, a collapse that threatens up to 33,000 American jobs in the coming months.
    Williams-Sonoma—Up 5.2%: The home furnishings retailer said revenue grew more than expected in the most recent quarter and gave upbeat projections for the year.
    Tailored Brands—Up 5.6%: Tailored Brands, the parent of Men's Wearhouse and Jos. A. Bank, posted a narrower-than-expected quarterly loss and beat on sales.

    Number of the Day

    Last year, 26% of all trading activity on the New York Stock Exchange’s flagship exchange took place in the last trade of the day, up from 17% in 2012. Trading activity is increasingly being compressed into the final minutes of the daily trading session thanks in part due to the rise in index funds.

    Must Reads

    What’s the Biggest Trade on the New York Stock Exchange? The Last One The NYSE operates between 9:30 a.m. and 4 p.m., but much of the action has moved to the final moments, thanks to the growth of index funds and others that flock to the day’s closing auction.
    SEC Charges Theranos Founder Elizabeth Holmes With Fraud: Holmes is forced to give up majority control of the company under agreement with the agency.
    Toys ‘R’ Us Tells Workers It Will Likely Close All U.S. Stores: Failure of big-box chain would put up to 33,000 Americans out of work.
    A Decade After Bear’s Collapse, the Seeds of Instability Are Germinating Again: A big financial-firm collapse in near future is exceedingly unlikely, but another crisis isn’t.
    Japan Antitrust Watchdog Probes Amazon—Again Officials from the Fair Trade Commission, Japan’s antitrust watchdog, have visited the headquarters of Amazon Japan to see if any violations of the Antimonopoly Act have taken place, a government official said Thursday.

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