Live Markets: With US yield curve disinversion, is recession on the horizon?

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06/09/2024 18:15

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    WITH US YIELD CURVE DISINVERSION, IS RECESSION ON THE
HORIZON?  
    There's an ongoing debate as to whether the disinversion of
the U.S. Treasury yield curve is flagging recession for the
world's largest economy. 
    The yield curve had been inverted for more than two years
before briefly reversing course on Aug. 5 for the first time
since July 2022. It has disinverted on and off this week.
    An inverted yield curve, specifically the U.S. 2/10 sector,
typicaly foreshadows recessions, predicting eight of the last 10
slowdowns. The curve is currently at 2.7 basis points (bps),
steepening after a lower-than-expected U.S. non-farm payrolls
report for August.
    For David Rosenberg, president and founder of Rosenberg
Research in Montreal, the curve disinversion is "just another
nail in the coffin on the recession call — delayed never did
mean derailed."
    He writes in a research note that 2/10 inversions can have a
long lag, noting that after a more than two-year inversion that
is then followed by a disinversion, the recession generally
begins within three months after that shift. 
    Rosenberg also points to the spread between U.S. two-year
yield and the fed funds rate, an indication of whether the Fed
is behind the curve in terms of monetary policy. That spread is
currently at -163 bps, the most inverted since 2008.
    "It's a a clear message from the bond market to the Fed that
it has bungled things again...in the same way it fell behind the
inflation curve back in 2022," Rosenberg says.
    Historically, the two-year Treasury yield and effective fed
funds rate tend to be similar because the market and the Fed
both play a role in determining these rates. When the fed funds
rate is a lot higher than the two-year yield, as is the case
right now, the bond market is saying that the Fed has waited too
long to cut rates. The Treasury market is already flagging a
downtrend in the economy, even as the fed funds rate remains
elevated.
    Rosenberg also points to recession signs everywhere. He
cites Dollar Tree's  DLTR.O  disappointing results this week.
The company, which caters to the low-end consumers, said its
data showed households with more than $125,000 in annual income
are 'buying for need' from 'buying for want,' with the sales mix
shifting substantially from discretionary items towards
necessities."
    "The fact that the economic strain has moved across income
lines is a very important recent development and suggests that
the dive in the personal savings rate to below 3%...is a general
sign that households are stretched."
    
    (Gertrude Chavez-Dreyfuss)
    *****
    
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