The US yield curve has been accentuated in three years

The US yield curve, watched anxiously by investors for signs of an impending recession, has been accentuated last week at the peak for almost three years, reflecting optimism that a rate cuts by the Federal Reserve would maintain the growth of the US economy.

The difference between the three-month and 10-year Treasury yields – which became negative or "reversed" before every US recession in the last 50 years – briefly returned to positive territory on Friday.

The measure closed the trading week at less than 1.6 basis points, down from 19 basis points a week earlier, the largest change in five trading days since the period following Donald's election. Trump to the presidency of the United States in 2016.

At the same time, the US stock market rose 0.8% this week, the S & P 500 index of large companies closing above 3,000 for the first time on Friday.

These measures served as a pretext for the Fed's penchant for a relaxed monetary policy, seen as a guarantee against a further deterioration of the US economy after the financial markets voiced concerns about the outlook.

Fed Chairman Jay Powell made it clear this week that the central bank would cut rates at its next monetary policy meeting at the end of the month, citing economic risks such as the US-China trade war, then same as it set the picture of a good general health American economy.

Despite the growing optimism of the yield curve, some investors remain cautious. Job growth was strong in June and consumer price inflation was strong, but manufacturing data and inflation expectations were weak. In the United States, the ten-year inflation breakeven, a measure of the inflation expectations market, has risen 8 basis points to 1.78% this week, but remains well short of inflation. the 2% target set by the Fed.

"The equity market is strengthening aggressively as we believe the Fed is going to make sure the economy is doing well," said Shawn Matthews, chief investment officer of Hondius Capital Management. "But they grow on a string. A 25 basis point rate cut will not improve the economy, but will improve financial badets. "

In his congressional testimony this week, Powell said his Fed colleagues felt "the rationale for a more accommodating monetary policy has been strengthened."

Investors see no chance that the Fed will maintain its rates at its next meeting, which will end July 31. The markets expect an 81% probability of a 25 basis point reduction in the exchange rate, depending on futures prices compiled by Bloomberg data. a cut of 50 bp. Traders are also banking on at least one other cup before the end of the year.

While some investors view the Fed decision as unjustified given the strength of US economic data, the most optimistic data has been overshadowed by the drop in bond yields and a reversed yield curve since the end of May.

"There is really no excuse for lowering rates," said David Kelly, global chief strategist at JPMorgan Asset Management. "They do it to avoid a market crisis."

Seema Shah of Principal Global Advisors said: "The Fed is reducing its rates, not in response to the economy, but in order to avoid a fall in markets. . . The Fed is put in a corner. We had a series of stronger data that at no time would have led them to reduce rates. "