The yield curve and wage inflation moderation

The US 10/2s yields curve has flattened remarkably. The spread is 0.257%. At 0% the yield curve will be flat and if it drops below 0%, it will invert. In effect the spread between longer term notes is shrinking against the short-term instruments. This is partly due to the rate hiking cycle that the Fed is due to start on 16 March. The consensus is for a 25bps hike. However, the fact that the longer-term rates have not kept up with the short-end of the curve is a concern.

While the Fed influences the short-term notes, investor sentiment affects longer-term yields. Investors may interpret the lack of pace on the US10Y as a lack of enthusiasm for longer-term prospects. However, we introduce another speculative possibility. The wage inflation released today, along with the non-farm employment change, printed at 0% m/m against a forecast of 0.5% m/m. Moreover, last month's number was revised downwards from 0.7% m/m to 0.6% m/m. The annual increase of 5.13% was below the Dow Jones estimate of 5.8%. If there is a moderation in inflation expectations, the short-end may need to adjust, leading to a steeping of the curve. This relaxation may improve investor confidence for the future, leading to higher longer-term yields.

Featured Image by Steve Buissinne from Pixabay

Trade the News: View our Economic Calendar

Russell Shor

Senior Market Specialist

Russell Shor joined FXCM in October 2017 as a Senior Market Specialist. He is a certified FMVA® and has an Honours Degree in Economics from the University of South Africa. Russell is a full member of the Society of Technical Analysts in the United Kingdom. With over 20 years of financial markets experience, his analysis is of a high standard and quality.

Disclosure

Any opinions, news, research, analyses, prices, other information, or links to third-party sites contained on this website are provided on an "as-is" basis, as general market commentary and do not constitute investment advice. The market commentary has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and it is therefore not subject to any prohibition on dealing ahead of dissemination. Although this commentary is not produced by an independent source, FXCM takes all sufficient steps to eliminate or prevent any conflicts of interests arising out of the production and dissemination of this communication. The employees of FXCM commit to acting in the clients' best interests and represent their views without misleading, deceiving, or otherwise impairing the clients' ability to make informed investment decisions. For more information about the FXCM's internal organizational and administrative arrangements for the prevention of conflicts, please refer to the Firms' Managing Conflicts Policy. Please ensure that you read and understand our Full Disclaimer and Liability provision concerning the foregoing Information, which can be accessed here.

Past Performance: Past Performance is not an indicator of future results.

${getInstrumentData.name} / ${getInstrumentData.ticker} /

Exchange: ${getInstrumentData.exchange}

${getInstrumentData.bid} ${getInstrumentData.divCcy} ${getInstrumentData.priceChange} (${getInstrumentData.percentChange}%) ${getInstrumentData.priceChange} (${getInstrumentData.percentChange}%)

${getInstrumentData.oneYearLow} 52/wk Range ${getInstrumentData.oneYearHigh}