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

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.


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