The U.S. and mainland Europe have moved in different directions over the past year on interest rates, equity returns, bond yields and government borrowing

Interest Rates

What a difference a year makes. The Federal Reserve has hiked interest rates thrice (in December, March and June) with a target rate range of 1.75% to 2% now. The Eurozone meanwhile maintains its zero-interest rate policy.

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Those three U.S. recession indicators – how near or far are those from being invoked?

We wrote recently about three slightly different U.S. recession indicators that have been predictive of the past few recessions. How near or far are those from being invoked?

30-year and 10-year Treasury yield

The 10-year Treasury yield has been greater than the 30-year Treasury yield three to six months before each of the past four. Currently the difference is just 19 bps.

And the 30-year, 20-year and 10-year Treasury yields have almost converged three to six months before each of the past five recessions as well. The 20-year yield already 3 bps higher than the 30-year yield, they have been converging for the past two weeks.

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The machines are slowly learning but they can and will be fooled

We get over 400 distinct bots that scan our website each month, the large majority of them look at the sentiment of our posts to provide signals to trading systems (well at least they claim to do that). Is machine learning helping shape the future? Is Artificial Intelligence going to drive the financial world?

The answer to both those questions is yes and no. There are several examples where Artificial Intelligence is being used in the financial world,

1. Image processing is being using to scan and clear or cash cheques/checks in real time.
2. Car driving pattern boxes or telematic devices which track how a driver is driving are helping drive down (or up) car insurance premiums.
3. It is claimed that data from wearable devices is being used to provide better health insurance premiums. Continue reading “The machines are slowly learning but they can and will be fooled”

Does the global economy run on fake data?

The picture below shows the distribution of an evening newspaper at London Bridge Rail station in London on a typical weekday. Every evening, thousands of copies are dropped off at the station, the paper is free for anyone to pick up and take away. And most evenings a large proportion of untouched and obviously unread papers are collected later during the evening by a recycling company.

Newspaper distribution in London
Newspaper distribution in London, how many copies are really read?

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This is what is likely to happen when the European Central Bank ends bond buying

The European Central Bank (ECB) announced on Wednesday that it will halve its bond buys to 15 billion Euros (from the current 30 billion Euros) a month from October then shut the programme at the end of the year.

Source: European Central Bank

ECB’s balance sheet has increased by 2 trillion Euros since 2015 when it announced its bond buying programme. 2-year yields for most of the Eurozone countries are currently negative and 10-year yields in most cases are lower than that of the United States. The European Central Bank (ECB) is by far the biggest holder of European bonds and the biggest (almost 90%) buyer of the weaker Eurozone (Italy, Spain, Portugal and Greece) countries debt since 2015. The ECB balance sheet is now over 4.5 trillion Euros, some 45% of Eurozone GDP.

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Three slightly different US recession indicators

Here are three slightly different US recession indicators that have been predictive of the past few recessions,

30-year and 10-year Treasury yield

The 10-year Treasury yield has been greater than the 30-year Treasury yield three to six months before each of the past four recessions. Graph below for the past decade, the shaded areas indicate recessions,

US 30 year and 10 year yield 2008 to 2018
Source: Board of Governors of the Federal Reserve System (US)

And the 30-year, 20-year and 10-year Treasury yields have almost converged three to six months before each of the past five recessions as well. Graph below, the shaded areas indicate recessions,

US 30 20 and 10 Treasury Yield
Source: Board of Governors of the Federal Reserve System (US)

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