US Treasury Yield Curve Inversion Triggers Flight-to-Safety
What’s been happening?
Pound Sterling – UK Markets
The British pound staged a decisive recovery against both the dollar and the euro on Tuesday after the General Advocate for the European Court of Justice (ECJ) published an opinion in which he said that the UK could unilaterally revoke Article 50. Additionally, the currency received support from the upbeat data as well. However, with the risk-off mood dominating the markets in the second half of the day, the currency failed to preserve its gains. Furthermore, Theresa May’s government got defeated in today’s vote giving more power to lawmakers over the next steps if May’s Brexit deal gets voted down on December 11.
Following yesterday’s upbeat Manufacturing PMI reading, Tuesday’s Construction PMI, released by the IHS Markit, in the UK showed that the business activity in the sector expanded at a faster pace than expected in November with the headline index improving to 53.4 in November to beat the experts’ estimate of 52.2. Commenting on the report, “November data indicates that the UK construction sector remains in expansion mode, with resilient business activity trends seen for housing, commercial and civil engineering activity. The latest overall rise in construction output was the fastest since July, helped by a stronger contribution to growth from house building activity,” Tim Moore, Economics Associate Director at IHS Markit, said.
Meanwhile, in his testimony to the Treasury Select Committee (TSC), Bank of England (BoE) Governor Mark Carney said that the underlying price of the sterling hadn’t factored in the high chance of a disorderly Brexit and added that the volatility witnessed lately was not ‘dramatic.’
US Dollar – US Markets
The inversion of the U.S. Treasury yield curve, the yield on the 5-year note falling below the yield on the 2-year note, for the second straight day on Tuesday, heightened fears over a possible economic slowdown and weighed on Wall Street while allowing the greenback to find demand as a safe-haven. Following a drop to 96.40 earlier in the day, the US Dollar Index, which tracks the dollar’s value against a basket of six major currencies, recovered to the 97 area in the evening.
Additionally, New York Fed President Williams voiced his support for further gradual rate increases and said that the U.S. economy was strong with indicators pointing to a healthy labour market to give an extra boost to the dollar.
The data published by the ISMN NY on Tuesday showed that the business activity in New York City expanded at a slower pace for the second month in a row in November with the headline Current Business Conditions Index slumping to a 5-month low of 67.8 from 69.8 in October. Moreover, the Investors Business Daily’s Economic Optimism Index fell to 52.6 in December to fall short of the analysts’ forecast of 57.3. Commenting on the data, “The mood of consumers seems to have soured slightly after bitter midterm elections, ongoing trade wars, significant layoffs at GM, and international turmoil,” said Terry Jones, IBD's Commentary Editor.
Euro – European Markets
The shared currency finished the day with small changes against both the dollar and the pound sterling on Tuesday. The data published by the Eurostat revealed that the Producer Price Index (PPI) in October rose 0.8% and 4.9% on a monthly basis in October with both figures surpassing the market forecasts. On Italy-related developments, Italy's economy minister Giovanni Tria said that the government was examining various options regarding a revision of the budget proposal. “The government is studying possible solutions in dialogue with the European Commission, the economic contraction in the third quarter is not impacting discussions with the EU,” Tria added.
What’s coming up?
UK: The IHS Markit will publish November (final) Services PMI data on Wednesday. The Financial Policy Committee is scheduled to release its quarterly statement as well.
US: Markets will be closed in honour of George H. W. Bush on Wednesday but the Federal Reserve is scheduled to release its Beige Book.
EU: The European economic docket will feature retail sales and the IHS Markit’s Services and Composite PMI reports. European Central Bank President (ECB) Mario Draghi will be delivering a speech in the early European morning.