Dun dun duuuuuun... The ringtone reserved for crisis situations was buzzing on Wall Street for a strange reason: The yield curve inverted. Translation: The interest rate the US government borrows at was higher for a 2-year loan than a 10-year one. Translation^2: The last 7 economic recessions were warned by this unusual solar eclipse-meets-blood-moon situation.
Everyone thinks the global economic party is going to be less fun... Which increases the chance that'll be the case. Central banks are lowering their country's interest rates on concerns that their economy could slow down. Here's why that's bad for markets:
- Germany and China are already sick: Those two heavyweights announced serious economic declines this week.
- If everyone thinks rates will keep falling, then they will: Expectations are important in finance. When the US Central Bank (aka "The Fed") announced the first interest rate cut in 10 years last month, it made the trend official.
- Banks are bumming: Citigroup fell 5% Wednesday. One of banks' core businesses is taking in money through your checking account and lending it out on the other side. Higher interest rates make that more profitable.
A lot's changed since December... Back then, the Fed was planning to increase interest rates in 2019 at least twice because the economy was doing so well. Since, the US vs. China trade war has spooked everyone.
- December 2018: 10-year lending rates were benchmarked by the US government's 2.911% borrowing rate.
- Today: That's down to 1.581%.
- PS: That's a huge difference, and today's rate is almost an all-time low.