What to expect as the inverted yield curve ends
After 26 months, the yield curve has finally un-inverted, marking the end of the longest inversion in 50 years. This development has sparked debate among financial experts. Some argue that, due to excess reserves and changes in money markets, the yield curve has lost its relevance as a recession indicator. However, historical data suggests caution. Recessions typically begin after the curve steepens again, not at the point of maximum inversion. In fact, the last four recessions started after the curve turned positive. However, on a positive note, market performance has varied after yield curves have un-inverted. The median return one year after curves have un-inverted has been 9% since 1966.
In July's Job Openings and Labor Turnover Survey (commonly known as JOLTS), job openings came in at 7.673 million, below the revised 7.91 million in June and the expected 8.1 million. This figure, falling short of all analyst forecasts, suggested a cooling labour market in July. It made some analysts anticipate a 50-basis-point (half a percentage point) rate cut at the next meeting of the U.S. Federal Reserve (the Fed). Current money markets have priced in 36 basis points (0.36 percentage points) of easing for September, implying a 44% probability of a 50-basis-point reduction. However, today’s U.S. jobs report will be crucial in determining the final size of the rate cut.
This week in Canada, we saw an interest rate cut of 25 basis points (0.25 percentage points). Bank of Canada (BoC) governor Tiff Macklem indicated that further interest rate cuts are likely, as policymakers balance economic weakness against persistent inflation in shelter and services sectors. Macklem also warned that inflation figures may initially appear disappointing later this year. The most unusual inflation numbers from last year will no longer be used for year-over-year comparisons, which will make the data look worse than it actually is. Right now, the BoC is surely hoping our southern neighbours do cut rates by 50 basis points. If the Fed were to implement such a rate cut, it would give the BoC more flexibility to cut rates faster without the risk of denting the Canadian dollar's value.
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