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China's Yield Curve Inversion Signals Sharp Slowdown Ahead

Tyler Durden's picture




 

As we have heard a million times on hundreds of business media outlets, the US 'cannot' be in recession because the yield curve has not inverted. Well, unfortunately for the savior-of-the-universe Chinese economy, their yield curve (the 2s-10s differential) has just inverted for the first time -  suggesting, as per Mike Darda of MKM, the Chinese economy is “set to slow rather sharply” and that has “negative implications” for commodities tied to industrial growth. Following on from our discussion of the 1tn RMB deposit infusion bailout, Darda also points out (via Bloomberg) the 8 months-in-a-row of OECD Leading index drops, weakness in the China PMI sub-indices, and the fragility of the shadow banking system via cracks in the real estate market and notes, with a wonderfully indignant note on CB success:

"It is worth remembering that the Fed has engineered only one soft landing in six decades of post-war monetary policy-making (1995)".

Further to this the FT reports a growing concern (noted here by HSBC's CEO Stuart Gulliver) over the potential for an Asian credit crunch both self-created and exogenously-driven by European bank deleveraging:

The strong increases in credit availability in Asia that has supported demand growth cannot continue indefinitely,” said Mr Gulliver, who was speaking in Hong Kong the day before his bank announces its third-quarter results.

“Any reduction in credit availability is likely to be gradual – but it remains a risk policymakers will need to manage. And we need to be careful to monitor the risk of a sharp withdrawal of credit by European banks as a result of events at home.”

 

And as the rate environment starts to adjust to 'slow' growth and a 'soft-landing', perhaps commodities will continue to slide south. Arguably - a 2s10s steepener on China seems like a way to play a harder-landing and the leading appearance of the commodity index suggests we have lots to look forward to (paging Dr. Copper?).

The CRB index appears to lead curve regime shifts - is the front-end of China's yield curve about to pop?

 

UPDATE: While the on-the-run 2y yield did trade above the 10Y yield on 9/26
(2s10s inverted), Bloomberg's generic 2Y CNY yield index has not updated in
three weeks meaning Mr. Darda's analysis is based upon faulty information. We do
not ethat since late September's inversion, however, the curve has begun to
steepen - which fits with the cycle turn analysis he discusses. (h/t SD!)

See below for the on-the-run 2Y and 10Y CNY bond yields:

Charts: Bloomberg

 

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Tue, 11/08/2011 - 15:35 | 1857730 Deadpool
Deadpool's picture

interesting.....the little growth engine that couldn't lead the world stalling. deflation in industrial metals, inflation in monetary metals. Good!

Tue, 11/08/2011 - 15:40 | 1857772 disabledvet
disabledvet's picture

From "sudden debt" to "sudden default." of course once you start you "can't put it down."

Tue, 11/08/2011 - 18:17 | 1858502 Hard1
Hard1's picture

"Buckle belt seat. You are please brace landing hard for". 

 

www.engrish.com

 

 

Tue, 11/08/2011 - 16:03 | 1857903 Ethics Gradient
Ethics Gradient's picture

Speak to Hugh Hendry. Actually, don't. I imagine he's spent the past twelve hours orgasming at the amount of money he's made. I can't imagine he'll be very coherent at the moment.

Tue, 11/08/2011 - 17:19 | 1858274 Divided States ...
Divided States of America's picture

Darda turning less bullish? Thats a change!

Tue, 11/08/2011 - 16:21 | 1857984 mirac
mirac's picture

maybe...but avoid those gold stocks that have a large copper component in its sales.  Gold and Silver may go down with the ship.

Tue, 11/08/2011 - 21:37 | 1859116 philipat
philipat's picture

Unlike in the "democratic" United Corporatocracy of America, China can, and does, move very quickly. They are already reversed into stimulus mode via injections of liquidity into the (Largely State owned) Banking system. Incidentally, they have USD 3 Trillion in reserves to play with.

PS. The Central Bank of China now appears to be buying Gold instead of Green paper, which should be of more concern to Tim and Ben.

PPS I wonder when Chanos' China shorts start to expire?

Tue, 11/08/2011 - 15:41 | 1857738 GeneMarchbanks
GeneMarchbanks's picture

Sharp slowdown? A ... a crash?

Great use of red arrows...

Tue, 11/08/2011 - 15:36 | 1857745 Dr. Engali
Dr. Engali's picture

The market is whistling passed the grave yard. California could be blown off the map and the market would still ramp up.

Tue, 11/08/2011 - 15:36 | 1857746 sodbuster
sodbuster's picture

Our bond markets are even MORE manipulated than the Chinese. How pathetic the US has become!

Tue, 11/08/2011 - 15:38 | 1857755 Withdrawn Sanction
Withdrawn Sanction's picture

Pretty tough nut for the US to have an inverted yield curve when the short end's at zero.  Flat maybe, but a recession just the same.

Tue, 11/08/2011 - 16:43 | 1858094 hedgeless_horseman
hedgeless_horseman's picture

 

 

Tough nut is right!  Especially when the oil needed to loosen said tough nut on economic engine is at $116.90 on the spot market. 

Louisiana Light Sweet Crude Oil Spot Price of $116.90

Tue, 11/08/2011 - 15:40 | 1857758 DormRoom
DormRoom's picture

And yet the S&P is 20% away from its all time high with unemployment >9%, 40M on foodstamps, slowdown across most industries, EZ about to implode, and Iran-Israel war imminent.

 

lmao. 

 

If the VIX is a fear index.  The S$P has become a speculation index, and detached from the real economy.

Tue, 11/08/2011 - 15:41 | 1857776 AndrewJackson
AndrewJackson's picture

I agree 100%. I tell myself this same thing every day.

Tue, 11/08/2011 - 16:48 | 1858124 hedgeless_horseman
hedgeless_horseman's picture

 

 

Do understand the S&P500 is priced in dollars, and the difference between real rate of return versus nominal rate of return.

http://www.investopedia.com/terms/r/realrateofreturn.asp

Tue, 11/08/2011 - 16:12 | 1857940 centerline
centerline's picture

Charles Hugh Smith nailed it earlier. The stock market, credit markets, etc. are all just life-support for munis / retirement funds. Otherwise, the bread and circuses would end quickly. The real action is in the bond markets / FX nonsense.

Tue, 11/08/2011 - 15:42 | 1857769 walküre
walküre's picture

When China stalls, the BDI should fall off a cliff. It's holding pretty steady still.

http://www.bloomberg.com/apps/quote?ticker=BDIY:IND

They can't manipulate shipping rates and shipping volume. That's where the rubber hits the road, where the metal hits the water literally.

Lots of new ships came online this year as well.

One of Germany's leading economic advisory board just revised their growth for Germany down. Recession in Europe is now inevitable. Most here believe the US never got out of the last one.

NO FURTHER EASING. GREATEST DEPRESSION FULL SPEED AHEAD. (and that is exactly what they had planned all along).

Tue, 11/08/2011 - 15:45 | 1857801 Let them eat iPads
Let them eat iPads's picture

That doesn't look very steady at all.

Tue, 11/08/2011 - 15:41 | 1857775 EZT
EZT's picture

Now they need to bomb Iran, keep up industial metals, and oil.

Tue, 11/08/2011 - 15:43 | 1857784 SheepDog-One
SheepDog-One's picture

Looking at todays indexes, it seems to me the only game around is to trip as many stop losses as possible all day. 

Tue, 11/08/2011 - 15:43 | 1857788 jcaz
jcaz's picture

Bonds never lie.....  Love it when yields invert in a freaky banking system.....

Tue, 11/08/2011 - 15:44 | 1857796 DormRoom
DormRoom's picture

Go to the economics history books.  No nation has been able to coordinate a soft landing after a property bubble.  All property bubble bursts have resulted in a hard landing.  If China can do it, she may be the first, but suffer other externalities.

Tue, 11/08/2011 - 15:46 | 1857805 Nemo01
Nemo01's picture

The market will take this bullish. It's the sign it has been waiting for - just look at what happened last time it inverted....

Tue, 11/08/2011 - 15:49 | 1857819 disabledvet
disabledvet's picture

It stands to reason that this is a direct result of the very real reality of a sudden default of the entirety of Italian debt. As has been reported China is a major holder of euro-denominated debt the annihilation of which is entirely calculable by the bond market in the form of an inverted yield curve followed by a recession. There is no substitute for diversification either in one's personal portfolio or just as importantly in how government in fact collect tax revenues. The bottom line is that the total reliance on Wall street for government revenue has been a total disaster for both. The only person I see setting the right example (finally!) is Jamie Dimon. His job is to talk with the Russian Oligarchs...not Congress.

Tue, 11/08/2011 - 15:55 | 1857853 YesWeKahn
YesWeKahn's picture

They print more than Bernanke, no worry in that front.

Tue, 11/08/2011 - 16:00 | 1857879 Shizzmoney
Shizzmoney's picture

And yet the S&P is 20% away from its all time high with unemployment >9%, 40M on foodstamps, slowdown across most industries, EZ about to implode

The bigger this thing gets, the harder the eventual fall.  I mean, we ALL know the market "push" is fake.

Unles Iran bombs Jerusalem.  Then the bull run continues.

Tue, 11/08/2011 - 16:07 | 1857922 moskov
moskov's picture

CREDIT TIGHTNING IS A GOOD THING FOR THE OVERHEATED ECONOMY. WHAT'S WRONG WITH THAT?

 

SO THE PEOPLE LIKE CHEAP MONEY AND ENDLESS GROWTH WITH NO MATCH OF THE DEMAND?

 

There are millions of Chinese are waiting for the property crash so that they can afford the housing as many as they, it will be a political suicide if Chinese government doesn't tackle the housing bubble before next year's change of power. The demand of property is still strong, but most of the people are waiting with their cash for the sudden drop of property prices.

Tue, 11/08/2011 - 16:11 | 1857938 Archimedes
Archimedes's picture

Wait! Am I high or did Tyler just give kudos to that Sleezeball Darda?

Tue, 11/08/2011 - 16:14 | 1857955 Stax Edwards
Stax Edwards's picture

This TD loves the white backgrounds on his terminal

Tue, 11/08/2011 - 16:14 | 1857956 chump666
chump666's picture

more bear signals out of China.  big one last mth/s or so was large CNY selling out of China and HK.  That is a classic example of a liquidity squeeze.  China's crash is coming, property through to developers to banks then finally local councils. going to be brutal

Tue, 11/08/2011 - 16:15 | 1857960 youngandhealthy
youngandhealthy's picture

Talk is cheap....! If ROW is going down...of course China will "talk down their currency too" (ref. FT article this morning)

Washington get their punishment now....don't call China a cheater...U will suffer. Fair? not if U ask me...but this is the world now.

Tue, 11/08/2011 - 16:18 | 1857971 chump666
chump666's picture

...that and all asian countries trade surplus are narrowing/pmi slowing, iron ore orices collpasing, copper trading lower.   

Tue, 11/08/2011 - 16:18 | 1857973 Dedwards
Dedwards's picture

Acapulco cliff dive, anyone?

Tue, 11/08/2011 - 16:19 | 1857976 chump666
chump666's picture

and someone please tell the dumb ass momo traders of wall street that italy's 10yr will hit the default range of 7% in 48 hrs.,.f*cking greedy rogue traders.

Tue, 11/08/2011 - 16:47 | 1858102 youngandhealthy
youngandhealthy's picture

Well...here we differ in view....I think not

 

http://screencast.com/t/e3phquclh1Ai

Tue, 11/08/2011 - 16:45 | 1858101 El Viejo
El Viejo's picture

Lets see when did it happen to US?  Was it June of 2008? This time we have too many looking at it so it could happen sooner.

When fear is rampant the markets become neurotic.

Tue, 11/08/2011 - 17:50 | 1858398 SILVERGEDDON
SILVERGEDDON's picture

HFT ain't good for me. CDS's gonna make some messes. TBTF gonna fall off a cliff. Wall Street is dead meat. Banks so bold layin' dead and cold. Gonna be prepper people, and the rest of the Sheeple. God bless this mess. I'm a poet, and didn't know it.

Tue, 11/08/2011 - 21:48 | 1859177 sneering nihilist
sneering nihilist's picture

this is why i still come here everyday. thanks.

Wed, 11/09/2011 - 10:13 | 1860543 dylan1
dylan1's picture

Hi Dylan,

Would like to know which instruments are you using to find out that the yield curve is inverted, are these 2 year and 10yr cny currency futures Thanks.

 

Thu, 11/10/2011 - 16:14 | 1867349 Chestire
Chestire's picture

There is the unlikely probability of underwriting restriction in 2s4s given new Ministry of Finance guidelines: 

http://gks.mof.gov.cn/redianzhuanti/guozaiguanli/gzglzcfg/201111/t20111104_605172.html

Is liquidity (for these maturities) at risk? 

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