Financial Markets: 3 Things Under the Radar This Week…

Financial Markets


1. Not All Yield Curve Inversions Are Created Equal

To many, an inverted yield curve is taken as gospel of economic doom and gloom, having preceded every recession over the past four decades. But some question whether shorter-term rates rising faster than longer-term rates (an inverted yield curve) carries the harrowing threat it once did.

St. Louis Federal Reserve President James Bullard certainly thinks it does. In a speech in Mississippi earlier this week, Bullard argued a “meaningful and sustained inversion of the Treasury yield curve would be a bearish signal for the U.S. economy.”

An inversion would suggest that financial markets expect less inflation and less growth ahead for the U.S. economy than does the FOMC, he added.


Bullard’s comments are hardly a new take on the implication of an inverted yield curve – far from it – but they are somewhat out of kilter with those of his colleagues.

In typical Fed speak, members said that the “unusually low level of term premiums in longer-term interest rates made historical relationships a less reliable basis for assessing the implications of the recent behavior of the yield curve,” according to the minutes of Fed’s March meeting released Wednesday.

The Fed ranks high on the list of suspects culpable for the low level of term premium, which is what investors get for holding a longer-term bond over a shorter-term one. At the height of the Financial Crisis, the Fed’s main tool, its benchmark rate, ran out of road after rates were slashed to zero. So, the Fed hatched a plan to buy longer-dated bonds in an effort to jumpstart credit markets and the broader economy.

With its printing press, or QE program, in full flow, the Fed, during a five-year stint, was the only game in town at the longer end of the curve. It ramped up purchases of Treasuries, ushering in an era of unusually low yields in longer-term bonds.

The Fed’s meddling in the bond market led many to believe that the Treasury curve’s prophetic powers are not as strong as they were. In the face of an inverted yield curve, therefore, some are quick to say “this time it’s different” and an imminent recession is unlikely.

Bullard’s New York counterpart John Williams agrees with that assessment. Earlier this week, he said the flattening yield curve is not signaling a recession, as its reputation for predicting downturns may be weaker in the current era of unconventional monetary policy.

But for all the hoopla that comes with an inverted yield curve, most agree that a prolonged inversion, with or without the Fed’s intervention, is something to worry about.

2. Gasoline Is Fueling Inflation

The headline for this week’s retail inflation numbers was that consumer prices were well contained. That’s because the market focuses on the core consumer price index (CPI), which excludes food and energy prices due to their volatility.

The core CPI rose 0.1% in March, less the than 0.2% rise economists forecast, according to compilations by The annual rise in core CPI came in at 2%, below expectations of 2.1%.

The core number gets all the attention no just because it smooths out the data, but because the Federal Reserve really loves core inflation. It tends to favor the core personal consumption expenditures (PCE) price index, but the core CPI is also in its sights.

But those looking at the core numbers might have missed the big reason why the full CPI rose 0.4%, more than expected: gas prices. Gas was responsible for 60% of the increase in March total prices. And there are signs this week that’ll keep getting worse.

On Wednesday the Energy Information Administration said gasoline inventories plunged by more than 7 million barrels, more than expected, sending gasoline futures up more than 3% for the day. Futures are up more than 30% year to date.

Retail gasoline prices are higher, too. AAA’s daily survey of retail gas prices put the U.S. national average at $2.761 a gallon, up nearly 22% for the year.

That not only means higher input costs for lots of companies and less spending power for U.S. drivers. It could have an impact on the Fed in the future, despite its dedication to the core. Trump Fed nominee Stephen Moore “has argued that the Fed should base its decisions on shifts in commodity prices,” GrantThornton Chief Economist Diane Swonk wrote in a note this week.

But Swonk also said Moore looks like he’s already changed his tune. “He was using a sustained drop in prices to justify a rate cut a few months ago,” she said. “One would assume higher prices at the pump would change his position; it has not.”

3. Will AI Discriminate?

The World Economic Forum tweeted out an article on gender inequality that featured a fascinating chart on the perceptions of C-suite diversity. The chart, which comes from Statista, shows that people across the globe vastly overestimate the proportion of CEOs who are women.

According to the chart, while just 3% of the top 500 global companies have female chief executives, those surveyed worldwide thought the percentage was much higher. Mexico overestimated the most, guessing 29% of CEOs were women, while Brazil and India both thought it was more than 20%.

At the other end of the spectrum, South Korea was closer with an estimate of 9%, while Australia and the U.K. went for 12%. This is already important for the market, as companies may not feel the need to press for diversity (which can improve results) if the consensus is that representation of women at the top is at a much higher level.

But the WEF takes it further in its article, postulating that artificial intelligence could exacerbate these mistaken assumptions and increase gender inequality.

“With the rapid deployment of AI, this biased data will influence the predictions that machines make,” Bettina Buchel, professor of strategy and organization at IMD Business School, wrote. “Whenever you have a dataset of human decisions, it naturally includes bias.” Any journalist who’s had to find an image for a story by searching for “CEO” (the most basic of algorithms) will know what gender will dominate the results.

AI is definitely one of the buzzwords the market likes to hear companies tout in their R&D plans (often no matter what the sector). But investors may want to dig a little deeper into how the companies plan to deploy those research dollars and what datasets they are relying on.


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