Thursday, August 15, 2019

Inverted yield curve signals a global recession warning; Dow falls 800 points in a day

  • Dollar
  • Gold
  • Euro
  • Dow Jones

Market recap: US’s 30-year Treasury yields fall to historic low in Asian trading session

Fears of a global recession are on the rise, after the yield on the US’s 30-year Treasury bond reached a new low this morning of 1.987%, dropping below 2% for the first time during morning trading in Asia. The news came just hours after the 10-year and two-year Treasury yields inverted during last night’s US trading session, meaning the two-year yield’s curve was higher for the first time since June 2007. What’s more, the UK’s curve between its two-year and 10-year yields also inverted for first time since 2008.

The bond market believes this could cause a global recession within the next 18 months, and one man who was less than impressed by the inversion was President Donald Trump. He let his thumbs do the talking once again, as he took to Twitter to blame the Fed’s Jerome Powell for the, “Crazy inverted yield curve” even going as far to label Powell, “clueless.”

Usually, 10-year and 30-year yields are higher than short yields (the Fed is currently holding a 2 to 2.25% rate) and inversions are rare. The last one between two-year and 10-year yields occurred in December 2005 - two years before the global financial tsunami hit the market. But it’s not all doom and gloom - former Fed Chair Janet Yellen claims the latest inversion could be a, “false recession signal,” adding she still has confidence in the global economy because she believes the US has enough strength to avoid a recession.

All three major US indexes closed around 3% down, with the Dow falling 800 points in a day, its biggest one-day drop since October 2018. The CBOE Volatility Index, a gauge of investor anxiety, jumped 4.58 points to 22.10. Although the inversion also sent a clear message that the Fed may need to cut rates again soon, the dollar index still rose towards 98.00’s level, whilst safe-haven assets such as the yen and the Swiss franc outperformed their G10 peers.

Elsewhere, China and Germany released disappointing economic data that also caused jitters in the market regarding a potential recession. Industrial output from China shows that year-on-year growth for July was only 4.8%, a drop from June’s 6.3%, which was also the weakest rate since February 2002. Retail sales rose 7.6% in July year-over-year, compared with 9.8% in June, which was higher than the expected 8.6%.

China’s economy grew at its slowest race in almost three decades in quarter two at 6.2%, as trade war tension affected exports. Germany is the largest economy in Europe, but its second quarter GDP fell by 0.1% compared with the previous quarter, and took the country’s annual growth rate down to 0.4%.

Today’s analysis: Fears of a global recession spread; Trump can’t stop Wall Street’s slump

President Trump might have decided to delay several tariffs on Chinese goods until later this year, but it’s clear the bond market feels the gesture is a case of too little, too late. The gap between two-year and 10-year yields dropped below zero in both the UK and the US yesterday, and China reported a weaker-than-expected retail sales and industrial output, which makes up 70% of its GDP. Germany’s economy reported a further reduction clearly influenced by the ongoing trade war.

The bond markets in both the US and UK have delivered a clear message to central banks: current short-term interest rates are behind the curve and market expectations. Market sentiment regarding this phenomenon means the Fed, BoE, ECB and global central banks need to lower their rates.

The dollar is supposed to be stronger than euro and sterling, considering global central banks will embrace the rate cut trend. The current US economy is still stronger than its counterparts, meaning the Fed doesn’t see a quick rate cut as vital or as pressing as it is for other central banks.

At GMT+4 12:30pm today, the UK will release its retail sales figures for July, with the market predicting a decline from 3.6% to 2.3%. Sterling may drop further to fall below 1.2’s level today as a result. At GMT+4 16:30, the US will also deliver its retail sales figures for July, and once again, the market is predicting a month-on-month decline, albeit a smaller one, from 0.4% to 0.3%.

Retail makes up around two-thirds of the US economy, meaning if the figure is higher than predicted by the market, the dollar may gain further, which will prove the bond market’s fears of a recession are exaggerated.