Risk Appetite Returns on Trump Auto Tariff Delay

Today’s main market move was driven by the Trump administration 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 today’s 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.

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