Mexico Economy Minister: NAFTA Must Remain Trilateral Accord

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FROM: Voa News / Reuters / 3 de marzo de 2018

MEXICO CITY — Mexico’s Economy Minister Ildefonso Guajardo on Tuesday rejected making a bilateral trade treaty with the United States, saying the North American Free Trade Agreement, which is currently being renegotiated, must remain a three-country accord.

On Monday, U.S. Trade Representative Robert Lighthizer said time to rework the deal was running “very short” and again raised the possibility of the United States pursuing bilateral deals with its partners, while stressing that Washington would prefer a three-way agreement.

NAFTA “has to be a trilateral accord, given the conditions of integration in North America,” Guajardo said in an interview with the Televisa network on Tuesday. “It must be that way.”

Lighthizer said on Monday that Mexico’s presidential election and the looming expiry of a congressional negotiating authorization in July puts the onus on the United States, Mexico and Canada to come up with a plan soon.

The latest round of talks have been clouded, however, by U.S. President Donald Trump’s plans to launch metals tariffs. On Monday, Trump tweeted that “tariffs on Steel and Aluminum will only come off if new & fair NAFTA agreement is signed.”

Guajardo said on Tuesday that if the U.S. government were to push ahead with metals tariffs that included Mexico, the country would be forced to respond with politically targeted tit-for-tat responses.

“There’s a list (of U.S. products) that we are analyzing internally, but we won’t make it public, we’re going to wait,” Guajardo said.

He also said that in a meeting in Washington last week, in which he met Commerce Secretary Wilbur Ross, he told the U.S. official that Mexico should not be included in the proposed tariffs.

“We’re allies in national security … our industries are highly integrated, we buy more (U.S.) steel than we sell, and so there’s no point in shooting oneself in the foot,” he said.

 

 

FROM: Voa News / Reuters / 3 de marzo de 2018

The economic relationship between Mexico and the United States

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FROM: Oup Blog / Roderic Al Camp / 17 de febrero de 2018

Mexico and the United States share a highly integrated economic relationship. There seems to be an assumption among many Americans, including officials in the current administration, that the relationship is somehow one-sided, that is, that Mexico is the sole beneficiary of commerce between the two countries. Yet, economic benefits to both countries are extensive.

Mexico has played a significant role in the rapid expansion of US exports in the 1990s and 2000s. It alternated between the second and third most important trade partner of the United States in the last decade. In 2014, the United States exported a total of $240 billion worth of goods to Mexico, with the largest  products coming from the computers and electronics, transportation, petroleum, and machinery sectors. By contrast, China only purchased $124 billion of US exports. Exports to Mexico accounted for approximately 1,344,000 jobs in the United States.

California alone, boasting the eighth largest economy in the world, exported more than 15% of its products to Mexico by 2014, exceeding what it trades with Canada, Japan, or China. As of 2014, Mexico’s purchases of California exports supported nearly 200,000 jobs in the state. In fact, 17% of all export-supported jobs in California, which account for a fifth of all individuals employed in the state, are linked to the state’s economic relationship with Mexico. More than half of those export-related positions can be traced to the North American Free Trade Agreement. California and Texas – the two largest economies in the United States, and two of the three largest state/provincial economies in the world – are significantly influenced economically by Mexico.

In 2014, a heavy portion of exports from six US states were purchased by Mexico: 41% in Arizona, 41% in New Mexico, 36% in Texas, 25% in New Hampshire, 23% in South Dakota, and 23% in Nebraska. As Senator John McCain noted several weeks ago, the Trump administration’s decision to renegotiate, rather than withdraw from NAFTA, prevented a horrific economic impact on Arizona. The GDP of the United States and Mexican border states accounts for a fourth of the national economy of both countries combined, exceeding the GDP of all the countries in the world except for the United States, Japan, China, and Germany.

The United States provides the single largest amount of direct foreign investment in Mexico, but what I want to stress, and to educate Americans about, is that Mexican entrepreneurs and venture capitalists invest heavily in the United Sates. By 2013, Mexico had invested $33 billion, the only emerging economy among the top fifteen countries with direct foreign investments in the United States. In 2015, Pemex, the government oil company, opened the first retail gasoline station in the United States, in Houston, and plans on opening four more in that city. This is a pilot project to test the American market nationally. OXXO, another Mexican firm, has opened two convenience stores in Texas, and plans on investing $850 million to open 900 stores in the United States.

Finally, Mexico also influences the US economy through tourism in the same way that American tourists play a central role in Mexico’s economy. In 2014, 75 million foreigners visited the United States, generating $221 billion dollars. Canada accounts for the largest number of visitors each year, followed by Mexico, which provided 17 million tourists in 2014, who spent $19 billion. Along the border, at the end of the decade, Mexican visitors generated somewhere around $8 billion to $9 billion dollars in sales and supported approximately 150,000 jobs.

Another way to look at the relationship between Mexico and the United States is through cultural influences.  Mexico exerts impact through music, food, film, and language. For example, there are multiple fast-food chains that spe­cialize in Mexican food. Grocery stores stock more items originating from Mexico than any other ethnic cuisine in the world, including beers, beans, hot sauces, peppers, and torti­llas. Corona is the best-selling foreign beer in the United States. Mexican foods such as guacamole and caesar salad are so com­monplace that they have lost their identity as Mexican cuisine.

The use of Spanish words and Mexican slang is evident in ev­eryday language in the United States; such terms range from “mano a mano” to “macho,” “enchilada” to “margarita,” and “rancho” to “hacienda.” According to a Pew Center study in 2011, 38 million individuals in the United States five years or older showed that the majority of them were Mexican, and were speaking Spanish at home. Spanish is also the most widely spoken non-English language among Americans who are not from a Hispanic country. The size of the Spanish-speaking audience in the United States has also influenced the growth of Mexican films. The musical influence has kept pace with cuisine. In 2010, the New Yorker magazine ran an extensive article about Los Tigres del Norte, a musical group from San Jose, California, who represent the norteño musical style. They boast a huge following among music fans. Selena, who died two decades ago, has sold more than 60 million albums, including songs representing the mariachi and ranch­era genres, and the number of copies of her posthumous best-selling album of all time, Dreaming of You, reached five million by 2015. Among young adults (18 to 34 years of age) who listen to the radio, Mexican regional music ranks seventh in popularity.

The relationship between the United States and Mexico has become more complex over time, incorporating cultural, musical, economic, familial, political, and security relationships beneficial to both countries and its citizens. But the most dramatic change in those many facets of our relationship with each other is the degree to which Mexico’s impact on and within the United States has grown in importance. Equally important to consider is that in spite of President Trump’s public criticisms of Mexico, our relationship at numerous levels, public and private, remains strong.

 

 

FROM: Oup Blog / Roderic Al Camp / 17 de febrero de 2018

Mexico’s economy rebounds in fourth quarter as elections loom

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FROM: Reuters / Michael O´Boyle / 30 de enero de 2018

 

MEXICO CITY (Reuters) – Mexico’s economy bounced back more than expected in the fourth quarter, according to preliminary data, but signs of slowing growth could feed discontent ahead of the presidential election in July.

Gross domestic product in Latin America’s second-biggest economy grew around 1.0 percent in seasonally adjusted terms in the October-December period, compared with the previous quarter, the national statistics agency said on Tuesday.

A Reuters poll had forecast an expansion of 0.6 percent. The economy rebounded after shrinking 0.3 percent in the third quarter as the country recovered from two devastating earthquakes that dented activity in the July-September period.

Higher interest rates and persistent inflation could weigh on consumer demand that helped support the Mexican economy last year amid uncertainty around U.S. President Donald Trump’s threats to pull out of a free-trade deal with Mexico.

It is still unclear if Mexico, Canada and the United States will be able to renegotiate the North American Free Trade Agreement (NAFTA), adding to concerns about the outcome of Mexico’s presidential race, which a leftist candidate leads in the polls.

“Important investment decisions may potentially be postponed, scaled down or even canceled,” Goldman Sachs economist Alberto Ramos wrote in a note to clients.

Data showed that the industrial sector edged up 0.1 percent in the fourth quarter compared with the prior quarter, crimped by a decline in oil production.

Agriculture grew 3.1 percent on a quarter-on-quarter basis while services grew 1.2 percent.

Mexico’s central bank is expected to hike interest rates again in February to contain a surge in inflation. Higher prices and more expensive loans could weigh on consumer demand, analysts said.

Mexico’s economy grew 1.8 percent in unadjusted terms compared with the same quarter a year earlier, the agency said.

For full-year 2017, the economy expanded at an unadjusted 2.1 percent rate, down from 2.9 percent in 2016. That is the lowest annual rate of expansion since 2013, President Enrique Pena Nieto’s first full year in office.

”The Mexican economy is surviving rather than thriving,” said Neil Shearing, an economist at Capital Economics.

Pena Nieto promised to boost Mexico’s anemic growth rates by passing major economic reforms, such as opening the energy sector to private investment. But an oil price slump sabotaged hopes to supercharge growth, as Pena Nieto had promised.

Slack growth could fuel support for opposition candidates in the July 1 election.

A poll on Monday showed leftist Andres Manuel Lopez Obrador consolidated support in his bid for the Mexican presidency, but the race has tightened as another opposition contender gained ground while the ruling party trailed.

 

 

FROM: Reuters / Michael O´Boyle / 30 de enero de 2018

Mexico’s finance minister isn’t worried about a ‘plan B’ for NAFTA

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FROM: CNBC / Natasha Turak / 25 de Enero de 2018

 

Mexico’s Finance Minister Jose Antonio Anaya appeared confident in the future of the North American Free Trade Agreement (NAFTA), telling CNBC Wednesday that dialogue between the trade partners was ongoing.

“Our central scenario is that this will go to a good deal,” Anaya said while at the World Economic Forum at Davos. “We believe trade is good for all three nations, and that’s what we’re hoping for.”

Asked about a potential “plan B” if the U.S. chooses to terminate the deal, Anaya stuck to a positive note, avoiding any doomsday scenarios.

Anaya’s Davos appearance coincides with the sixth and penultimate round of NAFTA negotiations currently underway in Montreal, Canada.

The 24-year-old agreement is now in jeopardy unless Canada and Mexico satisfy U.S. demands for changes to the deal. President Donald Trump maligned NAFTA during his presidential campaign, claiming it hurt American jobs, and threatened to abandon it altogether if his administration’s needs are not met.

NAFTA, which eliminated tariffs across territory encompassing 450 million people, has been a lifeline for Mexican jobs. Asked about the likelihood of a U.S. pullout, Anaya was vague.

“It’s hard to say, but … What we can say about the NAFTA negotiations is that there’s dialogue and there’s a process,” he said. Anaya took up the ministerial position in late 2017, after two years at the helm of state-owned oil company Pemex.

He echoed Canadian Finance Minister Bill Morneau, who spoke to CNBC earlier in the week, expressing confidence in the agreement’s preservation.

“Let us work on plan A,” Anaya said. “Plan A is that NAFTA has been good for Mexico, good for the United States, and good for Canada. That’s the way we see it, and we’re going to continue to work on a new version that is also good for all of us.”

“We want to keep it as a trilateral deal, and we’ve always worked on that front,” the minister continued. “The dialogue is going on, and that’s what we should bet on.”

Since the deal’s signing in 1994, U.S. foreign direct investment (FDI) into Mexico has increased from $15 billion to more than $100 billion, and regional trade has expanded from $290 billion to $1.1 trillion. Some 14 million American jobs depend on trade with Mexico and Canada, according to the U.S. Chamber of Commerce.

Disagreements persist over the negative impact of the trade pact on the American economy. Washington D.C.-based think tank Public Citizen has reported the deal led to the loss of up to 1 million U.S. jobs and a $181 billion trade deficit with Mexico and Canada.

The bulk of U.S. jobs lost were in former manufacturing hubs like Michigan and Texas, states that went to Trump in the 2016 election.

 

 

FROM: CNBC / Natasha Turak / 25 de Enero de 2018

Killing NAFTA would cost 300,000 American jobs, analysis says

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FROM: CNN Money / Patrick Gillespie / 16 de Enero de 2018

If President Trump tears up NAFTA, you’ll notice the impact. It would cost the United States 300,000 jobs, cut economic growth, hurt stocks and cause prices for consumer goods to rise, according to an analysis.

Oxford Economics, a global consulting firm associated with the English university, published the report a week before the sixth round of talks on NAFTA, the trade agreement between the United States, Mexico and Canada.

The 300,000 jobs would represent a setback of about two months of job growth at the economy’s current pace. About 14 million American jobs depend on trade with Mexico and Canada, according to the U.S. Chamber of Commerce.

If Trump decides to pull out, he has to give six months’ notice. Oxford assumes the job losses won’t come until 2019.

Negotiators from all sides meet next week in Canada to resume NAFTA talks. The first five rounds have yielded no major progress on divisive issues such as how and where cars are manufactured.

Leaders from Canada and Mexico say some Trump administration proposals are dealbreakers. The Trump trade team argues that Canada and Mexico are unwilling to compromise.

Trump has made it clear that if the United States can’t get the deal it wants, he will withdraw from the agreement, which has been law since 1994.

In such a scenario, U.S. economic growth would be slower in 2019 — 1.5%, compared with 2% if NAFTA is left in place, according to Oxford. The Federal Reserve estimates growth this year will be 2.5%.

Business investment growth would also slow because of concerns about protectionist trade measures from the White House, the analysis says.

And Oxford economist Oren Klachkin forecasts that investors would put their money into less risky assets like bonds and ditch stocks, causing the S&P 500 to be 5% lower than it otherwise would be.

To be sure, Canada and Mexico would feel the pain, too.

Oxford estimates that the Mexican peso would drop 8%, which would put it at an all-time low, and the Canadian dollar would decline 2.5%.

The Mexican and Canadian economies rely much more on trade, and could lose a larger share of jobs and investment compared with the United States.

Without a free trade deal, Canada and Mexico would raise their tariffs on American products more than the United States would charge for Mexican or Canadian goods entering America.

Every country has something called “most favored nation” tariffs, established by the World Trade Organization. Developing countries like Mexico are allowed to have higher tariffs than developed countries like the United States to remain competitive.

Oxford’s scenario does not assume that Trump would slap a 35% tariff on Mexican exports, as he threatened during his campaign.

Higher tariffs across the region would cause imports and exports to decline and prices to rise for consumers.

Oxford estimates that the U.S. economy would recover from the NAFTA-related hit by 2020 as businesses adjust to the new reality.

But Mexican leaders warn there would be far-reaching consequences in immigration. They think ending NAFTA would push more Mexicans to seek work illegally in the United States.

It would also be a major rupture in U.S.-Mexican diplomatic relations. It was American leaders who lobbied their Mexican counterparts in the 1990s to sign the agreement in the first place and lower its trade barriers.

The White House did not respond to CNNMoney’s request for comment.

 

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FROM: CNN Money / Patrick Gillespie / 16 de Enero de 2018

RBC boss says chances of NAFTA being scrapped are rising

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FROM: Thomson Reuters / 9 de Enero de 2018

TORONTO — Royal Bank of Canada’s Chief Executive Dave McKay said on Tuesday he believes there is now a greater chance that the North American Free Trade Agreement could be scrapped.

“I think the probabilities are increasing that you’ll have some type of dynamic where there is an announcement of a scrapping of NAFTA,” he said at a Canadian Bank CEO conference hosted by RBC in Toronto.

Canadian bankers have expressed concern about the progress of talks to rework the trade agreement and how renegotiations could hamper the ability of clients to do business with customers in the United States and Mexico.

McKay said he agreed with other business leaders and the Canadian government that no deal would be better than a bad deal.

“We don’t want to be stuck long-term with a deal that hurts our economy,” he said.

McKay also said RBC, Canada’s biggest bank by market value, is now spending $3 billion a year developing new technologies. The bank is one of the biggest Canadian investors in technology such as artificial intelligence and blockchain and has increased the proportion of its technology spending on innovation compared with maintaining existing systems.

© Thomson Reuters 2018

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FROM: Thomson Reuters / 9 de Enero de 2018

Mexico to Discuss Security With U.S. in Parallel to Nafta

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From: Bloomberg / Eric Martin / 11 de Diciembre de 2017

 

Mexico’s top diplomatic and interior officials will visit Washington this week to discuss security cooperation with their U.S. counterparts at the same time that negotiators work to overhaul Nafta, according to four people familiar with the plans.

 

The visit by Mexican Foreign Relations Minister Luis Videgaray and Interior Minister Miguel Angel Osorio Chong to meet with Secretary of State Rex Tillerson and Homeland Security Secretary Kirstjen Nielsen on Thursday is a follow-up to meetings in May, according to the people, who asked not to be named before the agenda is made public. It’s aimed at coming up with strategies to combat transnational criminal organizations, the people said. The press office of the Mexican Foreign Ministry and the U.S. State Department declined to immediately comment.

 

The meetings coincide with a sitdown by negotiators from the U.S., Mexico and Canada to update the North American Free Trade Agreement at the demand of U.S. President Donald Trump, who says the deal is responsible for hundreds of thousands of lost manufacturing jobs in the U.S. In an interview last month, Videgaray said that if the Nafta renegotiation encounters trouble, it could impact other areas of cooperation with the U.S. such as security and immigration. Mexico this year has seen homicides surge to the highest levels of this century, surpassing the previous record levels of the drug war from 2010 to 2012.

“It’s good for Mexico that we cooperate with the U.S. on security and also on migration and many other issues,” Videgaray said in the interview in Vietnam on Nov. 11. “But it’s a fact of life and there is a political reality that a bad outcome on Nafta will have some impact on that,” he said. “We don’t want that to happen, and we’re working hard to get to a good outcome.”

Videgaray told reporters last month that Mexico is prepared for the end of Nafta if it can’t reach a deal with the U.S. and Canada that benefits the nation. The three countries in August began talks to rework the pact after Trump pledged during the 2016 campaign to overhaul or end it.

This Week’s Talks

The latest meetings to revamp Nafta, taking place at the Mayflower Hotel, will run through Friday, largely out of the spotlight. Cabinet-level officials aren’t scheduled to attend for the second time since negotiations began, and the Trump administration is preoccupied with efforts to push through tax cuts by year-end and avoid a government shutdown. Videgaray’s portfolio includes the broad bilateral relationship with the U.S., while a team led by Economy Minister Ildefonso Guajardo has been focused on the commercial details of the Nafta negotiation.

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From: Bloomberg / Eric Martin / 11 de Diciembre de 2017

German firms more upbeat on Mexico, wary on NAFTA collapse – survey

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From Euronews / Dave Graham, Andrew Hay / 5 de Diciembre de 2017

German companies are more upbeat about the business outlook in Mexico than they were a year ago, but more than two-thirds believe that an end to the NAFTA trade deal would hurt their business there, a survey showed on Tuesday. The poll by the German-Mexican chamber of industry and commerce (CAMEXA) showed that more companies planned to invest and increase staffing than they did when surveyed a year ago, shortly after U.S. President Donald Trump’s election victory.

Some 54.6 percent of firms said they would boost staffing levels in 2018, a rise of nearly 10 percentage points from a year earlier. Almost 68 percent said they planned investment in the coming year, an increase of some 6 percentage points. The survey, which was carried out at the end of November, showed that 69 percent of firms believed that a collapse in the North American Free Trade Agreement (NAFTA) would have a negative impact on their business in Mexico. A total of 130 companies took part, CAMEXA said. Trump has repeatedly threatened to withdraw from NAFTA if he cannot rework it to the advantage of the United States. Negotiations between the United States, Mexico and Canada to rework NAFTA have made only halting progress so far, and many major points of disagreement remain with the Trump administration seeking to promote his America First agenda. The three nations have vowed to continue talks to overhaul the almost 24-year-old trade deal through March, when the Mexican 2018 presidential campaign begins in earnest.

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From Euronews / Dave Graham, Andrew Hay / 5 de Diciembre de 2017

Oil prices are poised for a pullback after OPEC announces its output cut decision

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From CNBC / Tom DiChristopher / 28 de noviembre de 2017

 

Market watchers see few opportunities for oil prices to rally — but plenty of room for them to fall — after a critical meeting of energy ministers later this week.

About two dozen oil exporters, including top producers Saudi Arabiaand Russia, meet on Thursday in Vienna to discuss extending a deal to keep 1.8 million barrels a day off the market. The historic agreement has helped to reverse a three-year oil price downturn that wiped out hundreds of thousands of energy jobs and piled financial pressure on both free market American drillers and countries dependent on oil revenue.

The market largely expects the 14-member OPEC cartel and a group of other producers led by Russia to extend the deal, which began in January and expires in March, through the end of 2018.

But just days before meeting, Russia has not committed to the nine-month extension, raising concerns that OPEC could settle for a shorter extension or push off a decision altogether. Either of those scenarios would spark a sell-off, analysts say, but oil prices will probably struggle to grind higher from recent 2½-year highs even if OPEC lives up to expectations.

Here’s how analysts expect markets to move under three scenarios.
OPEC extends by nine months
Andy Lipow, president of Lipow Oil Associates, expects OPEC to lock down the nine-month extension. But he also expects a pullback on the news.

The reason: Hedge funds have recently increased their long positions in oil futures, or bets that prices will keep rising. That makes prices vulnerable to a slide because traders often book profits by selling high. At the same time, the number of oil rigs operating in U.S. oil fields crept up in November, a trend that tends to weigh on prices.

“The market has gotten very, very long and as a result you can have some profit-taking triggered by the increase in the rig count on Friday,” Lipow said.

Tom Kloza, global head of energy analysis at Oil Price Information Service, also thinks a nine-month extension has been baked into prices, making it hard for U.S. West Texas Intermediate crude to rally beyond Friday’s 2017 intraday high of $59.05.

“We may look back at Black Friday as the as-good-as-it-gets number for U.S. producers,” he said.

U.S. crude could take another run at the $59 per barrel level, but OPEC would have to get the messaging just right, said John Kilduff, founding partner at energy hedge fund Again Capital. That includes a show of unity among regional geopolitical rivals Saudi Arabia and Iran and a clear signal that OPEC will force member countries Libya and Nigeria to cap their output after giving them a pass this year.
OPEC settles for six months
However, Kilduff thinks OPEC will only be able to commit Russia to a six-month extension.

He said the country’s energy companies have pushed back on Russian Energy Minister Alexander Novak and President Vladimir Putin as U.S. producers pick up market share in Asia, an important oil growth market. Russian energy giants are concerned that extending the cuts prematurely could leave the market undersupplied, causing a spike in prices that leads to another crash.

“If they do go six months I would expect them to spin it and say they’re going to review it next year,” Kilduff said. “That’s going to be seen as a disappointment.”

In that scenario, Kilduff sees oil prices falling back to the mid-$50 range.
Barclays expects either a six- or nine-month extension but says the market is asking the wrong question. Michael Cohen, the investment bank’s head of energy markets research, says traders should be asking whether exporters will be held to the same production caps they agreed to last year.

“It would be a misguided assumption in our view to expect the group’s production quotas to remain set in stone in 2018,” Cohen said in a research note Monday. “The sustainability of the deal depends on how much longer Saudi Arabia, Russia, Iran and Kuwait are willing to sacrifice market share in the pursuit of revenue and market stability.”

 

From CNBC / Tom DiChristopher / 28 de noviembre de 2017

The Economic Yield Curve Is the One to Watch

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From: Bloomberg / Joseph Carson / 21 de noviembre

 

The difference between the federal funds rate and economic growth is unusually wide, consistent with a positive outlook. The rapid flattening of the U.S. Treasury yield curve is raising concern about the economy’s prospects. That’s to be expected, since the slope of the curve has gained in importance as a forecasting tool due to its consistent and reliable track record. In short, a narrow curve is associated with a slowdown in growth.

The economic signal is even stronger when there is an outright curve inversion, which is when short-term yields exceed those on longer-dated Treasuries. We’re not there yet, but what has everyone up in arms is that at 63 basis points, the difference between two- and 10-year Treasury yields has collapsed from 128 basis points in January and is now the narrowest since 2007, just before the start of the last recession.

For some, changes in the Treasury yield curve are sufficient to warrant a change in the view on the future path of the economy. Right now, though, it’s not. It is important to balance the changes taking place in the financial market’s yield curve with the economy’s yield curve.
The economy’s yield curve is the spread between the federal funds rate and nominal gross domestic product. This relationship is most important since it’s the ability of the consumer and businesses to carry or afford the higher borrowing costs that could eventually impact economic growth.

Based on third-quarter data, the economy’s yield curve is close to 300 basis points, which is calculated by taking the 4.1 percent annualized rate of growth in nominal GDP less the quarterly average for the federal funds rate of 1.15 percent. The gap has expanded by 65 basis points from a year earlier. Even if the Federal Reserve, as expected, raises rates by 25 basis points at its December meeting the spread should widen based on estimates of 4.5 percent to 5 percent growth in nominal GDP.

In a historical perspective, the economy’s yield curve is unusually wide, consistent with a positive growth outlook. To be sure, the average spread during the 1990s growth cycle was 100 basis points and in the 2000s it was 200 basis points. Moreover, history also shows that a flat or an inverted spread between the federal funds rate and the growth in nominal GDP always precede an economic slowdown or recession.

In contrast, the traditional financial market yield curve, or the spread between the federal funds rate and the 10-year Treasury, stood at 110 basis points in the third quarter. It will likely end 2017 with the narrowest quarterly spread since the start of the last recession, sending the same signal as the two- to 10-year part of the curve.

It is quite possible that the narrowing of the traditional yield curve reflects technical factors more so than fundamental ones. The quantitative bond buying programs by the Fed and other central banks have no doubt produced an anchoring effect at the long-end of the bond market that was not present in prior cycles.

Also, changes in monetary policy often influence investor expectations on the outlook for growth and inflation. Given the current low-inflation environment, it could well be investors are betting that current path of monetary policy will dampen future inflation risks and possibly to lead to a reversal in short rates at some point down the road.

In all likelihood, the signaling effect from changes in the yield curve to the economy may not be as robust today and limited to the financial markets. The economy, meanwhile, will be supported by the wide and positive spread between the federal funds rate and nominal GDP growth, helping to support corporate profits and equities. The outlook for the fixed-income market is less sanguine because the positive growth environment will compel the Fed to continue to normalize monetary policy by boosting rates further.

 

From: Bloomberg / Joseph Carson / 21 de noviembre