Trump's fire and fury cause yield curve inversion, recession around the corner?

  • Yield curve inversion sparks fears of recession on Friday. 
  • Dollar comes under strong selling pressure as markets price Fed rate cuts.
  • Markets are waiting for US President Trump to respond to China tariffs.

The United States 2-year and the 10-year Treasury bond yield curve inverted to negative 30 basis points on Friday amid heightened concerns over a prolonged US-China trade war dragging the economy into a recession. As of writing, the 10-year T-bond yield was down 6.22% on the day at %1.510 while the 2-year reference was down 6% at 1.511%.

Earlier today, China announced that it will start imposing new tariffs on $75 billion worth of US imports.  "New tariff rates imposed on some US goods will be ranging from 5% to 10% and will take effect on September 1 and December 15," China's statement read.

Although most experts were expecting China to retaliate in some way or the other to the US decision to impose tariffs on $300 billion worth of Chinese goods, US President Trump's quick and intense reaction sent T-bond yields and Wall Street's main indexes spiralling down.

"We don’t need China and, frankly, would be far better off without them. The vast amounts of money made and stolen by China from the United States, year after year, for decades, will and must stop," Trump tweeted out. "I will be responding to China’s tariffs this afternoon. This is a great opportunity for the United States."

Dollar slides as investors price further Fed stimulus

Meanwhile, in his prepared statement that was delivered at the Jackson Hole Symposium today, Jerome Powell, Chair of the Board of Governors of the Federal Reserve System, said that the Fed was focused on how trade developments were affecting the outlook and added that they were standing ready to adjust the policy "to promote objectives." Following President Trump's Twitter rant, the probability of a 50 basis point rate cut in July rose to 14% from 0% seen on Thursday. 

Heightened probability of an aggressive rate cut also weighed on the dollar and dragged the US Dollar Index, which tracks the greenback's value against a basket of six major currencies to a fresh nine-day low of 97.67.

Among the major currency pairs, the USD/JPY pair erased more than 100 pips in the second half of the day with a strong reaction to the shift in the market sentiment. The EUR/USD pair erased this week's gains and now looks to post modest weekly gains near 1.1140. Similarly, the GBP/USD pair retraced its early drop remains on track to close the second straight week in the positive territory. 

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