Yield Curve and Financial Uncertainty: Evidence Based on Us Data
Efrem Castelnuovo (University of Melbourne)
June 2019
How do short and long term interest rates respond to a jump in financial uncertainty? We address this question by conducting a local projections analysis with US monthly data, period: 1962-2018. The state-of-the-art financial uncertainty measure proposed by Ludvigson, Ma, and Ng (2019) is found to predict movements in interest rates at different maturities. In particular, an increase in financial uncertainty is found to trigger a negative and significant response of both short and long term interest rates. The response of the short end of the yield curve (i.e., of short term interest rates) is found to be stronger than that of the long end (i.e., of long term ones). In other words, a financial uncertainty shock causes a temporary steepening of the yield curve. This result is consistent, among other interpretations, with medium-term expectations of a recovery in real activity after a financial uncertainty shock.
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Tropical storm forces evacuations in Louisiana: WSJ
Tariffs pinched China’s exports in June: Reuters
No sign of easing tensions in US-China trade battle: Bloomberg
Eurozone industrial output rose more than expected in May: FT
Turkey receives first shipment of controversial Russian missile system: NY Times
Oil glut expected to return in 2020, IEA predicts: CNBC
US jobless claims fell to 3-month low last week: Bloomberg
Core consumer inflation in US unexpectedly ticked up to +2.1% in June:

Federal Reserve Chairman Jerome Powell testified in Congress yesterday that a rate cut may be near. That’s music to the ears of the bond market because it offers more fuel for extending the rally in fixed-income assets.

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Iranian boats attempt to intercept British tanker: BBC
Flood risk rises for millions as Gulf of Mexico storm threatens: CNN
Oil rises to 6-week high on Iran tensions, Gulf of Mexico storm: Reuters
Fed’s Powell tells Congress that central bank is ready to cut rates: WSJ
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Fed minutes support case for rate cut: Bloomberg
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In the grand scheme of investing, behavioral risk is second to none on the list of pitfalls that threaten to derail the best-laid plans for investing. The challenge is especially acute in the thankless task of trying to anticipate how you’ll react when a rough patch arrives. The mystery is all the deeper if your only experience with a fund or strategy is holding it during a bull market. There are no easy solutions to this problem, but you can start to chip away at the uncertainty with a simple round of econometric analysis that focuses on return distributions.

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Trump is looking for ways to weaken US dollar: Bloomberg
US plans to form int’l coalition to patrol Strait of Hormuz and nearby waters: BBC
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Trump softened tone on China’s handling of Hong Kong to revive trade talks: FT
Mexico’s finance minister quits, citing policy disputes with president: WSJ
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With less than three weeks before the government publishes its preliminary estimate of second quarter economic data, revised nowcasts have trimmed expectations for US output. Today’s estimate calls for a substantial slowdown in Q2 growth, based on a set of projections compiled by The Capital Spectator. The downgrade for the GDP nowcast comes at a time of concern that recession risk, for the US and the global economy, is rising.

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US and China set to relaunch trade talks: Reuters
Wall Street wonders if US will pursue weak-dollar policy: Bloomberg
US lawmakers don’t share Trump’s criticism of Fed chief: WSJ
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In addition to the day job here at The Capital Spectator, your editor is now a contributing writer for a series of columns for The Milwaukee Company on risk, portfolio management and the usual suspects that generally fall under the heading of the money game. The agenda is broad, the raw material for analysis is endless, and the journey still begins with a first step. In this case, it’s a brief primer on applying basic risk metrics to portfolios in the cause of separating the wheat from the chaff.

Property shares in the US and offshore markets posted the biggest gains for the major asset classes in the first week of trading for the third quarter, based on a set of exchange-traded funds.
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