The charts have the last word on the US recession

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A man shops at a store in Manhattan on July 28, 2022 in New York City. [Photo/Agencies]

Forget political wrangling, investors are watching Treasury yields and seeing bad omens

As politicians wonder if the United States is in a recession, a metric watched closely by investors on Wall Street and beyond suggests the economy could weaken in the weeks and months ahead.

The Treasury yield curve is considered one of the reliable indicators of a recession, and investors watch for an inverted yield curve, which occurs when short-term Treasury bill rates are higher than long-term rates. .

Investors who put their money in a 10-year Treasury instrument instead of a two-year note may be indicating that they lack confidence in the overall health of the economy.

The Federal Reserve has raised interest rates by 225 basis points to fight inflation this year, sending the yield on the two-year Treasury nearly 50 basis points above that of the 10-year note. .

It is the deepest reversal since 2000. The reversal retreated to 40 basis points from 50 on Wednesday after weaker-than-expected inflation data for July, markets columnist Jamie McGeever said on Wednesday. capital for Reuters.

Reversals occur when investors sell stocks and transfer their cash into bonds. Their thinking is that the smaller guaranteed returns on bonds could outweigh what they could lose by holding stocks entering a recession. Higher demand for bonds leads to lower yields.

Historical Guide

“This widespread loss of confidence explains why inverted yield curves have preceded every recession since 1956,” according to the CNBC network.

The last reversal began in December 2005 and preceded the recession which officially began in December 2007, followed by the global financial crisis of 2008. There was also a reversal in returns before the bursting of the tech bubble in 2001.

On March 31, two-year and 10-year yields reversed for the first time since 2019.

Recessions don’t start right after a reversal. Historically, a reversal tends to precede a recession by six to 18 months on average.

Inflation is at its highest level in four decades. While the consumer price index fell in July, recording an 8.5% year-on-year increase, U.S. stock markets this year had their worst start to a half since 1970.

However, the weak rise in inflation, reported on Wednesday, sparked a rally in the stock market, with the tech-focused Nasdaq re-entering bull territory.

“The only reason we’re seeing this rally is because oil is falling, and that’s not a good enough reason,” Vladimir Signorelli, head of Bretton Woods Research in New Jersey, told Forbes.

The downward slope of the yield curve will also erode margins and dampen bank lending. The economic impact of banks reducing credit to businesses and households is a negative development.

“The slope of the curve matters,” said Christopher Wolfe, managing director of North American banks at Fitch Ratings in New York.

The Fed’s latest survey of senior loan officers shows a “significant” net 24% of banks tightened lending standards for commercial and industrial loans in July.

Morgan Stanley’s Betsy Graseck estimates that the three largest US banks, JP Morgan, Bank of America and Citi, may need to cut their riskiest assets by more than $150 billion by the end of this year.

As for the debate over whether the U.S. economy is already in recession, gross domestic product growth has been negative in the first and second quarters of this year, a development that fits the traditional definition of a recession. .

But many economists say a buoyant job market, with average job growth this year of nearly 500,000 a month, will lead the National Bureau of Economic Research to refrain from calling the current situation a recession.

Peter Earle, a researcher at the American Institute for Economic Research, said the most surprising aspect of the job market is that “the number of Americans working not just two jobs, but two full-time jobs, has reached a record high”.

Mauro Forlin, asset manager for financial media group Money-Web, said in a column Wednesday that some economic signals could be recessionary. He notes that the ISM index of new manufacturing orders has been in contraction since June. This signals that some businesses are starting to see a slowdown in new orders and demand.

Agencies contributed to this story.

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