DoubleLine's Gundlach: Treasury curve inversion signal 'economy poised to weaken'

This Market Indicator That Frequently Signals a Recession Just Flashed Red

This Market Indicator That Frequently Signals a Recession Just Flashed Red

The spread between the two dropped to negative 0.01 percentage point on December 3, the first time that has happened since 2007. The Aussie moved sharply off a four-month top of $0.7394 hit early in the week.

Global equities have been shaken by fears of a recession, fanned by the flattening U.S. Treasury yield curve - a phenomenon in which longer-dated debt yields fall faster than their shorter-dated counterparts.

"The market decline in the US overnight and the flattening of the yield curve reflect that economic growth momentum is taking over as the primary concern for investors", Tai Hui, a strategist at J.P. Morgan Asset Management told clients. An inversion of the yield curve has preceded past recessions.

"They react more aggressively to weak data than to strong data", Yamamoto said. Ahead of the 2001 recession, the entire curve dropped into inversion in sync in February 2000. The euro was 0.11 percent lower.

Dallas Federal Reserve bank president Robert Kaplan said the Fed was now in a "more challenging" period as global growth slows and parts of the American economy begin feeling the impact of Fed interest rate increases.

The dollar stumbled last week after Federal Reserve Chairman Jerome Powell on Wednesday said USA rates were nearing neutral levels, which markets interpreted as signaling a slowdown in rate hikes.

To be sure, this week's inversion has been limited so far to the front-end of the yield curve rather than more closely studied recession harbingers such as the gap between 2-year and 10-year note yields. Benchmark 10-year notes gained 13/32 in price to yield 2.966 percent the lowest since September 13.

"The Federal Reserve may slow down the pace with which it hikes interest rates, but it won't lower rates yet, so the likelihood there will be an inversion of these is low", Sera said. The mood further soured after data showed Australia's third-quarter growth fell short of expectations. Yields had risen earlier after a deal between the United States and China to hold off on new tariffs boosted stocks and reduced demand for safe haven USA debt.

The ministry said the Chinese side would work to implement specific issues agreed upon as quickly as possible, and was confident they would be implemented.

The dollar was 0.77 percent lower against the Japanese yen, which tends to benefit during geopolitical or financial stress as Japan is the world's biggest creditor nation.

On Tuesday, the greenback shed almost 0.8 percent against the yen, which acts as a safe haven in times of geopolitical and financial turmoil as Japan is the world's biggest creditor nation.

US markets are closed to mark former President George H.W. Bush's death, but the effect of Wall Street's turmoil in the previous session, when New York-listed shares tumbled more than 3 percent, was felt in Asia and Europe.