Although coincident growth data is holding up for now, there are a number of macro “red
flags” at present, in particular flattening yield curves (despite the recent bounce, US 2s10s
is still 34bps flatter YTD) and falling excess-liquidity conditions. Yield curves are one of our
favourite and longest-leading indicators for gauging future growth prospects. Almost all
yield curve measures we track suggest worsening global growth prospects.

The left chart below shows US 2s10s in nominal and real terms. We can see that both are
now starting to flatten once again. The right chart shows our global yield curve composite,
which looks at yield curves across more than 30 countries worldwide. This measure tends
to lead global growth (proxied by the US PMI) by about 9 months. We can see that currently,
global yield curves are flattening again, undoing the steepening we saw in the immediate
aftermath of the US presidential election back in November 2016.

Flattening yield curves remain a key headwind for the Trump reflation trade. Should yield
curves keep flattening, especially as the Fed raises rates, then we would be on high alert for
US recession risks. For now the risk of a US recession in the next 3-4 months remains very
low, but this could change quickly should flattening yield curves persist.

(Click on image to enlarge.)

Source: Bloomberg, Macrobond and Variant Perception