Aurelia Butler

(Reuters) – The closely watched two-year/10-year part of the U.S. Treasury yield curve briefly inverted on Tuesday, which in the past has indicated that a recession could start in one to two years.Other parts of the yield curve, however, including one of the Federal Reserve’s favorite recession indicators – the gap between three-month and 10-year yields – have been steepening and remain a long way from inversion.Here is a roundup of what some market participants think about the yield curve.GOLDMAN SACHS STRATEGISTS, LED BY PRAVEEN KORAPATY “The nominal curve tends to invert more easily in a high inflation environment, and we could see earlier and/or deeper curve inversions this cycle. In such an environment, a deeper nominal curve inversion may be needed to produce the same recession odds in models as seen in more recent business cycles.”ERIN BROWNE, PORTFOLIO MANAGER, MULTI-ASSET STRATEGIES, PIMCO”Historically in very high inflationary environments, like we are in today…looking at real yields and the real yield curve is a better indicator of growth risks. The real yield is still very steep.””The extraordinary amount of QE has lowered term premiums and worsened the flatness of the curve. As a result, this is a very different cycle.”JPMORGAN STRATEGISTS, LED BY MARKO KOLANOVIC“The flat/inverted yield curve was historically a good cycle signal because it would indicate that financing conditions have become highly restrictive, but we do not see this at present. Real rates averaged +200bp at the time of past curve inversions, vs current negative levels, while bank lending standards are still easing.”BRUNO BRAIZINHA, INTEREST RATE STRATEGIST, BANK OF AMERICA“The recent 2s10s curve dynamics reflect recession risks.”“Inversions are a significant mile-marker for late-cycle transitions, with implications for expected returns and covariances across asset classes. Scope for a more hawkish Fed near term likely exacerbates medium-term risks to the outlook.”JONATHAN COHN, RATES TRADING STRATEGIST, CREDIT SUISSE“2s10s…may not be as strong or worrisome of an indicator in the current environment as it has been historically given much of the “weight” on the long-end reflects compressed term premia as opposed to inherent “overtightening” expectations. Nevertheless… it is sensible to price a higher recession probability particularly now that the Fed has gestured toward its higher tolerance for economic weakness in exchange for price stability.”JIM REID, HEAD OF THEMATIC RESEARCH, DEUTSCHE BANK“The Fed have long preferred measures like the spread between the 18m forward 3m yield and the 3m yield….The biggest implication of this is perhaps that the Fed won’t see a 2s10s inversion as a reason to slow down rate hikes.”“I still prefer 2s10s as a lead indicator since we can go back with a successful track record over far more cycles than the Fed’s preferred measure but it’s fair to say the record difference between the measures is now stark and worth debating.”ANSHUL PRADHAN AND SAMUEL EARL, INTEREST RATE STRATEGISTS, BARCLAYS“On the surface, a downward-sloping yield curve simply points to expectations of rate cuts by investors and does not indicate why. Investors might be worried about a recession and expect the Fed to cut rates. Alternatively, they could be expecting the Fed to cut rates in response to falling inflation. Both are plausible explanations, though history suggests the former is more likely.”“Is this time different? We find the usual explanation of low term premium, due to factors such as the Fed’s balance sheet, unsatisfactory…Investors are willing to accept a low term premium when they are worried about downside risks to growth, suggesting that the term premium also contains information about the outlook.”WELLS FARGO MACRO STRATEGISTS, LED BY MIKE SCHUMACHER“The link between curve shape and growth has been weak at best since 2009.”“Why has the yield curve lost its mojo? Heavy bond buying by central banks has caused long-term yields to diverge from economic fundamentals.” More

WASHINGTON (Reuters) -The International Monetary Fund said on Wednesday it has updated its guidance on capital flow restrictions to allow member countries to impose pre-emptive measures to reduce the risks of abrupt capital outflows causing financial crises or deep recessions.The IMF’s institutional view on capital controls was launched in 2012 in the wake of the 2008-2009 financial crisis to allow for capital flow management measures and macroprudential measures in the event of capital surges.Under the new guidance, countries would no longer have to wait until capital flow surges materialize under the new guidance. They could impose such measures to counter a gradual buildup of foreign-currency debt that is not backed by foreign currency reserves or hedges, the IMF said.IMF First Deputy Managing Director Gita Gopinath said the changes were the result of analysis of recent capital controls practices by countries and research into current economic conditions and vulnerabilities.”You want to be able to ensure that you are not building up further financial vulnerabilities – and you can take measures preemptively to prevent that from happening,” Gopinath told reporters in introducing the new guidance.”So that when the environment changes, for instance, like the current environment that we’re in where interest rates could go up very sharply, that you’re able to better insulate your economy,” she added. More

That’s the estimated cost increase the fast-food company might face if it stops buying meat from producers who put pregnant sows in gestation crates, according to two industry experts. For customers, that means adding two half-strips of bacon to a burger could cost more than $2 in Chicago, where McDonald’s is based.Icahn’s pitch to end what he and animal-welfare experts call the inhumane treatment of animals comes at a time when consumers are already grappling with soaring prices for gas and grocery items. The meat industry has been hit particularly hard during the pandemic due to a shortage of U.S. workers, and now the spike in fuel prices is driving higher shipping costs. President Joe Biden has urged Congress to assess whether meat processors are engaging in anticompetitive behavior.“Prices are going up across quick-service restaurants pretty aggressively,” said Mike Halen, an analyst at Bloomberg Intelligence. “I don’t know how much more consumers are going to be willing to accept in terms of price increases right now, especially with prices going up for everything.”McDonald’s raised menu prices about 6% last year in the U.S. More hikes may be on the table as the company expects higher food and paper inflation this year in the U.S., compared with 2021.Billionaire Icahn has nominated two directors to the boards of McDonald’s and grocery giant Kroger (NYSE:KR) Co. as part of his campaign against gestation crates. Back in 2012, McDonald’s said it would require its U.S. pork producers to outline their plans to phase out the use of the stalls, which are too small for pigs to turn around in. The company’s current policy, however, allows for the confinement for about six weeks in early stages of pregnancy. Some members of the pork industry say the crates protect sows’ health.Icahn has urged McDonald’s to require all of its U.S. suppliers to move to “crate-free” pork and to set a specific time frame for doing so. A spokesman for the company declined to comment beyond its statement from February, which said that “the current pork supply in the U.S. would make this type of commitment impossible.”Eliminating the practice entirely would be a tough undertaking for the industry, and for Smithfield Foods Inc., the world’s biggest pork producer. “Any disruption to hog production would certainly have an impact on pork prices,” said Russell Barton, director at commodity researcher Urner Barry. “If you are restricted in the amount of hogs you can produce in a given facility, by giving them more space and things like that, then you are going to ultimately end up with tighter pork supply unless you make it up for it and build more facilities.”At Coleman Natural Foods, which doesn’t use gestation crates at all, farmers are paid as much as 20% more than the commodity price depending on the market, according to Jim Wallace, a senior director in the company’s live-hog operations. Its farmers also don’t use antibiotics or synthetic hormones in raising its pigs.Steve Meyer, a consulting economist for the National Pork Board and the National Pork Producers Council, expects prices could rise around 5% if gestation crates are eliminated. “You’ve got to cover all costs and it all depends on so many factors,” he said.“But to some families, anything higher is important,” Meyer said. “We ought to think about them.”©2022 Bloomberg L.P. More

WASHINGTON (Reuters) – Kansas City Fed president Esther George said she estimates a neutral rate of interest for the U.S. at about 2.5% “as a starting point” of what the Fed should aim for in upcoming rate increases as it assesses what impact it is having on the economy.”We will have to be watching how the economy unfolds to get a sense of where rate policy is getting traction” and how high rates ultimately need to go, George said, arguing that if consumers as anticipated shift spending back towards services they may be less influenced by Fed rate increases. More