Why Are Markets Spooked By A Flattening U.S. Treasury Yield Curve?

Eibel and the team of Russell Investments strategists believe the yield curve will probably continue to flatten as the month progresses. Why? The U.S. Federal Reserve (the Fed) is likely to increase interest rates at its Dec. 18-19 meeting, he said—and this should drive up the yield on the 2-year note. Meanwhile, worries over slowing economic growth are leading to downward pressure on the 10-year note, Eibel remarked. In addition, he added, economic expectations and inflation both influence the slope of the curve—and both of these factors will likely be somewhat driven by the outcome of the U.S.-China trade situation.

November employment report: Wage gains unchanged as the U.S. adds 155,000 jobs

On Dec. 7, the U.S. Bureau of Labor Statistics unveiled the country’s employment report for November, Eibel said. “The key highlight in the report is that there is no key highlight,” he quipped, explaining that the U.S. added 155,000 jobs, while the unemployment rate remained steady at 3.7%. Average hourly pay, which has garnered increasing attention this year, also matched October’s year-over-year increase at 3.1%, Eibel noted.

“These numbers are some of the last real data points to be released prior to the Fed’s upcoming meeting—and I think they won’t alter the central bank’s decision on a final rate increase for 2018,” he stated. In his opinion, it’s highly likely that the Fed will raise interest rates later this month—as the numbers appear to confirm that there’s probably still enough strength in the U.S. economy to justify a hike. “The real focus, in my view, is what the Fed does at its March 2019 meeting,” Eibel stated, concluding that he and the team of Russell Investments strategists believe there’s an above-average probability that the central bank will raise rates then as well.

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