It might be time to start tightening the purse straps, and pinching pennies; as some people have begun ringing alarm bells on Wall Street, due to some troubling news, which indicates we could be on the verge of a recession according to recent market data.
Recently, the U.S yield curve became inverted, meaning the short-term Treasury rates are above the long-term yields.
When Did This Start?
Earlier this year—in May—the curve became inverted, and, since then, it has steepened. This steepening indicates a greater disparity in value.
Over the last 50 years, every recession in the U.S. has been prefaced by an inversion of the yield curve.
The spreads between 5- and 30-year yields as well as 3- and 30-year yields are now the furthest apart they’ve been since 2017.
What it Means
Normally, this would be a sign of growth. However, in this case, the curve has been steepening due to a significant drop on shorter-term debt yields, which is an indication that trouble is ahead.
According to Albert Edwards, a Societe Generale market analyst: “A far more immediate and present danger of recession occurs when after inversion, a rapid steepening occurs. That event usually informs investors the cycle is over, and it is time to flee for the hills.”
Edwards was quick to sound the alarm bells, saying: “Rapid curve steepening is now occurring, suggesting recession may indeed either be imminent or else it has already arrived.”
Tom Essaye, the founder of Sevens Report Research, echoes Edwards’ sentiments, saying: “what the bond market is doing is signaling the chances of a recession are more likely than the chances of a renewal of the expansion. Even though the yield curve is steepening, it’s not giving a very positive sign on the market.”
While many are concerned about the recent market trends, it’s not all doom and gloom. Tom Lee, head of research at Fundstrat Global Advisors believes this is a “strong cyclical signal” that economic growth will begin accelerating again.
Shawn Matthews, a chief investment officer of Hondius Capital Management, believes the equity market is rallying aggressively due to the belief that the Fed will ensure the economy continues to thrive.
What Happens Now?
Investors don’t expect the Fed will hold rates at their next meeting. Markets are currently pricing in an 81 per cent chance of a 25bp rate cut according to Bloomberg data, and there are still traders betting on a 50bp cut.
According to David Kelly, chief global strategist at JPMorgan Asset Management, “There is really no good excuse for cutting rates at all. They’re doing so to avoid a market meltdown.”
“The Fed is not cutting rates in response to the economy, but rather, they’re doing it in order to avoid a market fallout,” adds Sheema Shah of Principal Global Advisors. “The Fed put itself in a corner. We have had a run of stronger data which at any other time wouldn’t have led them to cut rates.”