The yield curve is flattening which implies a recession is coming, especially if it inverts and becomes negative. The difference between the 3 month Treasury versus the ten year Treasury ranged from 1.1% to 2.1% and is now 1.38%. If it drops another 0.18% the yield curve will be very close to its low point of the past year. After the market closed today IBM came out with a bad earnings report; its shares plunged 3.9% in after-hours trading. This could contribute to additional downward pressure on interest rates.
China and Japan continue to look for ways to wiggle out from the pressure from Trump to open up their markets to American exports. One way for foreign nations to evade the pressure is to devalue their currency making American exports cost too much. The way to devalue is to simply buy a lot of Treasury Bills which pushes up the value of the dollar. Recently these countries have been increasing their holdings of U.S. Treasuries. They can be bought secretly through conduits in the Caymans and in Brussels. As they buy Treasuries that drives down U.S. interest rates and raises Treasury bond prices.
Recently news stories were in the press claiming that Trump would stimulate the economy making interest rates go up to as high as 6% for the ten year Treasury. Experts were claiming that the trendline for Treasuries was broken when it hit 2.6% a few months ago and that the next level of resistance was 3%.
The core CPI MoM drop of 0.1% has happened only 5 times in 600 months, which is quite rare, so that’s a clue that disinflation is coming. Much of the source of inflation in the core are rents. Once landlords give up offering concessions in lieu of rent cuts then the official price of rent will go down and since this is almost half of core CPI it will make inflation come near zero. Since many investors got mad at low yields and reacted by buying rental property to earn a yield, they may be very unhappy if their rental income dropped 4% while they were stuck with the same costs and thus experience a reduction in net yield. In Miami there are reports of a big increase in unsold new condos which means they will get dumped on the market thus inducing landlords to cut rents.
Investors need independent financial advice about the rising odds of a recession.