Yesterday's main market move was driven by the Trump administration's expected decision to delay auto tariffs by up to six months. The deadline for a hard decision is Saturday on whether national security concerns warrant tariffs on autos. The markets welcomed the news as stocks soared and safe-haven currencies gave up most of their earlier gains.
Despite the optimistic tone, the NY Fed’s favorite recession indicator is once again inverted as the gap between the three-month and 10-Year yields widens. The last inversion in March only lasted a week and the one prior was in 2007. This inversion, however, may be more of a signal investor are applying a deflationary hedge (paying a premium to hold longer-term debt) and not a pure signal for a recession. Historically the 10-year and 3-Month inversion has successfully identified a recession within 12 months, with the only false positive occurring during the 1990s when Long-Term Capital collapsed triggered a systemic financial crisis.
The US dollar/Japanese yen’s correlation to Treasury yields has held up nicely over the past month. If we see the 10-year yield on Treasuries continue to drift lower, we could see the dollar-yen slide towards the post-January flash crash lows of 107.50.
