Bearish Wedding

The debt market contains bearish and bullish steepenings of the yield curve. A bearish steepening occurs when the long end sells off more than the short end, while a bullish steepening is the result of the short end rallying more than the long end.

A parallel situation is taking place in terms of China’s trade balance. Its trade surplus remains near record levels — $39 billion in December, down from the record $40.1 billion in November. However, these figures are not being generated by strong exports, as was previously the case. Rather, exports have fallen on a year-over-year basis for the past two months, but imports are falling significantly faster — plummeting 21.3 percent year-over-year in December after a 17.9-percent drop in November.
The rise of intra-Asian trade was embraced by policymakers as an alternative to the heavy reliance on the U.S. markets, and was the apparent basis for some degree of decoupling from the U.S.

However, increased reliance on intra-Asian trade seems to be amplifying the region’s economic downturn. The same day China released its GDP figures, Japan reported its exports to China fell by more than a third in December, indicating its once seemingly indestructible export machine has stalled. Later that day, South Korea reported its economy contracted 5.6 percent in Q4 2008, more than double what economists had predicted.

Despite the Korean won being the worst-performing Asian currency in 2008, Q4 Korean exports of goods fell by an eighth from the previous quarter, which is the biggest decline since the late 1970s. Singapore’s economy collapsed by a nearly 17-percent annualized pace in the fourth quarter.