A sign of a coming recession? On Monday, the yield on 5-year U.S. Treasury notes fell below those of 3-year notes for the first time since 2007, which many investors believe is a sign of a coming economic slump. Indeed, every U.S. recession since World War II was preceded, typically by six months to two years, by a similar “inversion” of the yield curve between 2-year and 10-year Treasury notes. (Ahead of the 2008 crash, the 3-year and 5-year yield flipped for the first time in late 2005.) Right now, the 2- and 10-year curve is flattening, but not quite inverting – its spread hit its lowest level since 2007. And in any case, it’s unclear whether an inverted yield curve is as good a predictor of recessions as it once was. The yield has jumped the gun a couple of times in the past, inverting and then steepening again with a recession nowhere to be found, no doubt complicated by the massive quantitative easing programs undertaken by major economies over the past decade. Still, it’s clear that the U.S. economy is at the peak of the business cycle. And considering the (admittedly early) slowdowns taking place in Europe and Asia, there could very well be nowhere to go but down.
Israel prepares for its next war. On Tuesday, Israel Defense Forces launched an operation to “expose and thwart” cross-border attack tunnels it said were dug by militants from Hezbollah. An IDF spokesman said the operation would take place solely on Israel’s side of the border with Lebanon. He also noted that additional troops had been deployed to northern Israel, but the military has yet to call up of reserves (something that often precedes military action). This is just the latest step Israel has taken to address the buildup of threats on its borders. It’s also been waging an air campaign in Syria to cut off supply routes between Iran and Hezbollah, while seeking to reach some sort of truce with Hamas in Gaza. But the IDF and Hezbollah are likely headed toward a bigger confrontation. Hezbollah has already crossed one of Israel’s red lines by acquiring advanced precision-guided munitions from Iran and, according to Israel, manufacturing these missiles in Lebanon. Israel believes it must act pre-emptively to eliminate potential threats, so now it’s making its case for war.
Don’t fear the BRI. Panama became the first Latin American country to participate in China’s Belt and Road Initiative, signing a slew of deals with Chinese President Xi Jinping during his visit on Monday. Naturally, this sort of thing tends to innervate U.S. officials, but most of their concerns are misplaced. BRI could have profound strategic implications closer to China – at a minimum, it will probably enable Beijing to circumvent maritime chokepoints in the Western Pacific, and it may well give the Chinese navy a foothold in the Indian Ocean. But for the most part, BRI is a commercially driven project that poses little strategic risk to the U.S. – especially the farther one gets from Chinese shores. Even if China could somehow use its economic influence to convince a country like Panama to give it a military base, the Chinese navy is a long, long way from developing capabilities to do much with it.
- France will suspend a fuel price hike planned for Jan. 1 for six months amid nationwide “yellow vest” protests.
- Venezuelan President Nicolas Maduro will meet with his Russian counterpart, Vladimir Putin, in Moscow on Wednesday.
- Presidents from Mexico, Guatemala and Honduras and the vice president of El Salvador signed a regional development agreement that will help encourage job creation, stem migration and combat poverty
- The U.N. said it is seeking $738 million from member states in 2019 to help Venezuela’s neighbors cope with heavy flows of migrants and refugees.
- Indian Defense Minister Nirmala Sitharaman is in Washington for five days for talks on implementing new U.S.-India defense deals and settling bilateral tensions concerning Russian arms sales.
- Unnamed Italian officials told Politico the government intends to drop its proposed budget deficit in 2019 to 2 percent in response to threats of disciplinary action by the European Commission.
- Kyrgyz President Sooronbay Jeenbekov has said the six-member Eurasian Economic Union must work toward adopting a common currency and eliminating border controls within the bloc.
Editor’s note: An earlier version of this report erroneously stated that Chinese companies led the consortium that built the new Panama Canal. The error has been corrected.