The US yield curve isn’t the only one on the precipice. There are any number of them that are getting attention for all the wrong reasons. At least those rationalizations provided by mainstream Economists and the central bankers they parrot. As noted yesterday, the UST 2s10s is now the most requested data out of FRED. It’s not just that the UST curve is askew, it’s more important given how many of them are.
Look to our neighbors to the north. The Canadian curve is slightly ahead of the UST curve in that regard. It really shouldn’t be this way, not according to the narrative. Inflation has hit 3%, the highest in seven years, and Canada’s oil economy is thriving again.
The Bank of Canada is raising rates in the same way as the Federal Reserve, and not coincidentally at the same time. Flashback to 2014 when the Canadian economy was supposed to have lifted off like its American counterpart. Here’s StatCan’s summary of the situation from September 2014:
The pace and composition of economic growth varied over the first two quarters of 2014, as modest gains during winter months gave way to stronger, more broad-based growth during the spring. Household final expenditures accelerated in the second quarter, after moderating at the start of the year. Export volumes, which weighed on growth during the first quarter, contributed strongly to second-quarter gains. Increases in the volume of production were broad-based in late spring. The output of service industries increased steadily through the second quarter, while goods industries advanced in late spring. Auto sales were a major contributor to economic activity in May, bolstering manufacturing sales, wholesale and retail sales, exports and imports. Inflation increased during the spring months on higher prices for food, shelter and transportation.
Sounds very familiar. Did the Bank of Canada need to act in 2015? Not raising rates. They did, however, move in the opposite direction, the one long-term Canadian bonds had been signaling throughout sunny 2014. The Canadian economy was beset by “transitory” factors and felt the same economic risks of eurodollar event #3 as everyone else did.
