Markets Tues 12/4 - Morning Brew

MARKETS Tariff Man, Bond King, and a Brutal Day for Markets

Via Giphy

Markets got clobbered yesterday, with investors asking tough questions about global trade wars and a potentially slowing economy. Where did the President Trump of the G20 summit go? He left Buenos Aires, went into a phone booth, and emerged as... Remember: Over an elegant Saturday night dinner, President Trump and Chinese President Xi Jinping agreed to put their trade war on hold for 90 days. But mixed messages and a change in tune following the G20 meeting has investors wondering, "So...what exactly was agreed to, again?" Here's one example of the confusion: President Trump tweeted that China will "reduce and remove tariffs on cars coming into China." But his top economic adviser, Larry Kudlow, said a deal hadn't been reached yet. Also, what's going on with the yield curve? Don't look now, but the yield curve has (sort of) inverted. On Monday, the spread between three- and five-year U.S. government bond yields dropped below zero for the first time since 2007. Quick vocab break: The yield curve is the difference between interest rates on short-term government bonds and long-term government bonds. When it inverts, long-term rates are lower than short-term rates. So why is that spooking investors? Every time the yield curve's inverted since 1960, a recession has followed. This may help explain: In a strong economy, long-term rates are higher to offset the risk of any growth-induced inflation. When they're lower? The economy could be "poised to weaken," as DoubleLine CEO Jeff Gundlach said of the most recent inversion. And when Wall Street's "Bond King" speaks, people tend to listen. But if history is any indication...a recession is still a ways off. Plus, the two- to 10-year yield curve (considered the better indicator of a possible recession) remains upwardly sloped...even though it's at its narrowest since 2007.