Transmission Troubles: Flattening Curve Persists Amid Rate Concerns

Rates Spark: Transmission issues

A weak US sentiment index failed to snap the curve flattening trend, as markets keep their powder dry ahead of labour market data. Attempts to engineer a steeper euro curve are set to result in greater risk premia elsewhere.

 

Curve flattening remains the market's default mode

The fall in the June US ISM Manufacturing from already worrying levels at least prevented US yields from mounting another attempt at rising to new post-SVB highs. One has to wonder how much appetite for new risk there was in a reduced hours session yesterday and ahead of the Independence Day holiday today. More fundamentally, despite conventional wisdom suggesting that the manufacturing sector provides an early read of future activity, markets have been wrong-footed before. We wouldn’t be surprised if some investors kept their powder dry ahead of the more immediately relevant labour market indicators due to be published on Friday.

 

Probably also due to the market’s focus on labour market indicators, the ISM release didn’t allow the curve to snap its flattening streak. Besides the, justified in our view, macro rationale for the move, such a notable tendency to flatten regardless of rates going up or down suggests heavy flow in that direction. The new Bank of England (BoE) member Meghan Greene was also responsible for adding some hawkish fuel to the fire in an FT column.

 

Unless it replaces rate hikes, QT stands little change of re-steepening the curve

✕