The flattening of the United States yield curve has come to an end.
Normally when the curve stops flattening, it starts to steepen – and quickly. But I don't think that will happen this time.
It's been quite an unusual cycle, and I don't expect the sort of easing that would normally be needed for the curve to start steepening straight away.
What’s clear is the forces that have contributed to the flattening have run their course.
One of the unique features of the current cycle is the way participants in the economy have taken a view about the outlook. Several indicators are consistent with recession, or at least very poor economic conditions.
The yield curve in the US flattened very early. The Philadelphia Federal Reserve’s business expectations index is currently at the lowest level since 1979. Consumer sentiment in the US collapsed - relative to current conditions - over most of the past two years.
The yield curve itself has been inverted for months, at levels not seen since the global financial crisis – or even the dot.com bust.
There's a consistent message across these indicators of incoming very poor economic conditions. I think that view is going to be tested over the next few months - and why the curve, in my view, has probably stopped flattening.
The market's fear has been the US Federal Reserve – in its bid to address the inflation shock – risked overtightening and causing a deep and protracted recession.
But I don't think that's what will happen. In fact, over the rest of 2022, as the Fed delivers tightening and the economy - in underlying terms - remains solid, the market is likely to step away from that sentiment.
Richard Yetsenga is Chief Economist at ANZ
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