Good question Samuel. I'll respond with both theory and data. In general, the yield curve is a "leading" indicator. It tends to be one of the best predictors of market cycles which is why no one on ET watches it (sarcasm off). A steepening yield curve is very bullish in general. It usually means there is plenty of credit available for both the private and public sector and also usually indicates there is ample liquidity. Banks have greater incentives to lend because their economic incentive to do so is increasing. The steepening yield curve also is the market's way of pricing in future growth. Growth and inflation are synonymous here. So with plenty of liquidity, higher growth priced in going forward and ample credit, that is a recipe for increasing GDP and overall economic growth.
The flattening curve says the opposite of the above. That liquidity is tightening, forward growth is being removed from the market and the incentive to lend is not there.
Now, we are in kind of a unique situation here in that we have had an unusually long period of low short term rates. The previous recession ended some time ago but that was not reflected in the yield curve completely. Having said that, there is no way the yield curve should be steepening if the market truly believes this current credit expansion is going to end soon.
Now, let me provide the data. Here is a great link that allows you to look at the shape of the yield curve along with the S&P 500. Just click on either one and the opposite chart will adjust. You can clearly see how the yield curve flattened going into 2007 and how it steepened in 2009.
http://stockcharts.com/freecharts/yieldcurve.php
Now if you are asking do I think the curve will flatten anytime soon predicting a credit contraction and possible recession, I don't see any evidence to support that. I do see potential shocks along the way (both Europe and China) so we are seriously overdue for a market correction (mild one), but I don't see any data that would support a recessionary thesis. And with Yellen clearly stating that Fed rate hikes will be incremental and slow, the back of the curve will likely respond hard and fast. This will lead one to believe that the curve has a lot more steepening to go.
