Negative Yield Curve
August 3, 2006
The yield differential is now negative and real cause for concern. The probability of recession in the next four quarters has risen to 27% according to the Wright model. Annual core consumer price index figures of 2.4% mean that the Fed is unlikely to pause yet in its cycle of rate hikes -- further increasing the risk of an economic down-turn.
Gold is strengthening, along with crude oil, as the dollar weakens.
The yield on 10-year Treasury notes is testing support at 5.0%.
Medium Term: Long-bond yields are likely to continue in an up-trend.
Long Term: The yield differential (10-year T-notes minus 13-week T-bills) has fallen below zero, making the economy extremely vulnerable.
- probability rises above 25%: while not yet cause for concern, watch the indicator regularly for signs of further deterioration;
- above 50%: the situation is becoming volatile -- so exercise caution;
- above 75% means dire risk of an economic downturn.
Spot gold is rallying to test resistance at $680.
Medium Term: Failure to break out above $680 would be a bear signal (two lower highs after the May peak), placing support at $600 under threat. A fall below $600 would be an even stronger bear signal.
Long Term: The primary up-trend continues, with primary support at $540/$550.
Light Crude appears headed for another test of resistance at $80 after forming a bullish higher low at $73/barrel. Breakout above $80 would signal another up-trend, while reversal below $73 would mean a test of primary support at $70.
The dollar is weakening against major trading partners in the short-term.
The US Dollar Index is likely to test support at 83/84 in the weeks ahead. A close below this level would mean a test of the 5-year low at 80.
The FTSE 100 is trending slowly upwards, whipsawing around the 100-day exponential moving average, and appears headed for another test of 6130.
Medium Term: Reversal below 5700 would signal another test of primary support at 5500. Twiggs Money Flow (21-day) is trending upwards, signaling accumulation.
Long Term: The primary up-trend is intact.
The Nikkei 225 is testing resistance at 15500/15600.
Medium Term: A higher trough on Twiggs Money Flow (21-day) signals accumulation. A fall below 14200 would confirm the primary down-trend.
Long Term: The index is consolidating with no clear trend as yet. A close above 15600 would signal reversal to a primary up-trend.
The All Ordinaries is consolidating in a narrow band between 4880 and 4980. A rise above 4980 would be bullish, signaling an up-trend if the index is able to break through resistance at 5100. However, a fall below 4880 would mean another test of primary support at 4800.
Unless we solve that problem it will avail us little to solve all others.
~ Theodore Roosevelt, October 1907.