China's Yield Curve Inversion Signals Sharp Slowdown Ahead

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