This comes via Andy Lees:
The Chinese 2’s – 5’s yield curve, as measured by swaps, flattened back to 23bpts making bank lending along the curve less profitable and therefore indicating an imminent credit tightening. Clearly with China’s regulated system it is not quite so easy, but Reuters (Richard Bernstein) highlights that now both Brazil’s and India’s sovereign curves actually inverted last week which invariably precedes a recession for the aforementioned reason. As Reuters says an inverted curve is not a signal that inflation is the problem but rather that the government has over-tightened. Bernstein said “The markets are still priced for very rapid unhindered growth, and I just think the probability of that is getting less and less”. Brazil raised base rates for a fourth straight time and indicated more rate hikes on the way. South Korean M2 money supply growth slowed to 3.9% y/y in April which as you can see by chart 2 is approaching all time lows.
I am concerned that the emerging markets have overheated and are now reversing direction quickly. Policy rates are still low when adjusted for inflation. But, given the economic weakness now manifest across North America and Europe, the risk is clearly to the downside for now.
Below is the South Korean M2 Chart from Andy