U.S. Treasury Yield Curve Hits Flattest Level Since Before Financial Crisis

Investors turned their attention to Fed news and economic data on Wednesday, driving up U.S. Treasury yields in the process.

Of significance importance is the yield curve. It is getting a lot of attention because it has reached its flattest level since before the financial crisis and this may be a sign of impending danger.

On Wednesday, U.S. government debt yields rose after the release of key U.S. economic data, including the Federal Reserve’s Beige Book.

Investors liked the Beige Book results. According to the central bank, the U.S. economy expanded at a modest pace in September despite the impact of hurricanes on some regions.

The Fed also noted the stable economy and the tightest labor market in years, however, it did little to move inflation. The Fed characterized the increase in wages and the cost of materials as “modest.”

Fed officials also said they still expect labor and material bottlenecks to spur inflation higher, but the Beige Book doesn’t find much evidence.

Economic News

Total mortgage application volume rose 3.6 percent for the week according to the Mortgage Bankers Association. Volume was nearly 19 percent below the same week a year ago, when interest rates were lower.

Building Permits came in at 1.22 million units, below expectations. Housing Starts also came in below expectations at 1.13 million units. U.S. homebuilding fell to a one-year low in September as Hurricanes Harvey and Irma disrupted construction. The 4.7 percent decrease drove housing starts to their lowest level since September 2016.

In other news, according to CNBC, U.S. President Trump is likely to announce his pick for Fed Chair at the start of next month. Speculators are betting that Trump will pick a hawk, which would mean higher rates in 2018. On Thursday, Trump meets with current Fed Chair Janet Yellen to discuss this matter.

Gold

Gold prices continued to retreat on Wednesday in reaction to a firmer U.S. Dollar. The Greenback was underpinned by rising U.S. Treasury yields. The catalyst behind the rise in yields was speculation that the next U.S. Federal Reserve chief may be a monetary policy hawk. Gold sellers are also responding to rising optimism over U.S. tax reform.

Crude Oil

U.S. West Texas Intermediate and international-benchmark Brent crude oil rose modestly on Wednesday after a surprising drop in U.S. refinery runs and an unexpected increase in inventories of gasoline and diesel.

Prices also continued to be underpinned by ongoing tensions and rising risk premiums surrounding Iraq and Iran.

According to the U.S. Energy Information Administration, weekly crude inventories fell by 5.7 million barrels, exceeding expectations for a 4.7 million draw down. Inventories of gasoline and diesel rose, reviving some concerns about elevated inventories during a time when demand for petroleum product declines.

In other news, refining output fell 4.7 percentage points to 84.5 percent of capacity, representing the seasonally slowest rate of output since 2011. The drop-off was tied to the start of fall maintenance season.