Markets in decline as the inverted yield curve in the U.S. just became even more inverted. (Photo … [+]
The inverted yield curve is now even more inverted. Sadly, the economy looks to be seriously breaking down.
The yield on the two-year Treasury hit 3.87% on Friday, up from 3.78% on Thursday and now running higher than its long-term average of 3.14%. To put it simply, when interest rates for short-term lending are higher than interest rates for long-term lending (10 year at 3.45%) that means lenders see greater risk in lending today than they see lending to someone in the future.
You were warned on August 5.
“We’re facing a severe economic slowdown globally,” Edwards Jones investment strategist Mona Mahajan told CNBC’s Squawk Box this morning. “We had the hotter than expected inflation report this week…and the S&P from a technical perspective is looking weaker as well. We need to see the inflation picture improving. The consumer is still in decent shape, but we are not seeing recession conditions.”
We will.
The market is testing the Fed at this point, daring them to raise rates amid an economic slowdown. But considering how no one is willing to say the U.S. is in an actual recession — only a technical one — what is stopping the Fed from sticking to its mandate to fight inflation? To them, there is no recession, really. The job market is too strong. Unemployment isn’t even 4%.
They’re in a Catch-22. If they keep hiking rates, the economy will slow for sure as companies become wearier about their finances. Job cuts begin. The Fed then gets its recession and can stop increasing rates, assuming inflation declines.
“There is nothing but economic contraction that comes from the 2-year yield rising above the 10-year yield,” says Vladimir Signorelli, taking time out of his cruise to Mexico on Friday. Signorelli is the head of Bretton Woods Research, a macro investment research firm out of Long Valley, NJ.
Higher nearterm interest rates mean higher mortgage rates. That’s good for those looking to buy a house and have been priced out. But housing prices need to fall further before a lower sticker price makes up for a higher mortgage rate.
Federal Reserve Board Chairman Jerome Powell. Don’t blame me for this mess. (Photo by Alex … [+]
On a year-over-year basis, existing home sales and new home sales are down 20.2% and 29.6%, respectively. That’s because prices are still outrageous. This week Zillow revised its 12-month outlook and now predicts that U.S. home values will climb 1.4%. That’s the wrong way. Housing inflation is not helping the U.S. economy one bit. Some of this is due to supply chain problems because apparently the U.S. can’t make lumber and bathroom fixtures so it has to import everything by boat from China, which is in and out of Covid lockdowns. And the European multinational shippers have spent the better part of the last two years jacking up shipping prices. Also not helpful.
If housing slows, headwinds are coming for construction workers and all of those businesses on the margins kept alive by government stimulus during the pandemic. That stimulus is gone. And now the economic rug is being pulled out from under them.
At this rate, barring the captains of the Titanic shifting hard to starboard, a “deep recession” in the core economies is likely, as Barclays said last Friday and has reiterated all week.
“Unless Powell gets a clue, this is disastrous Federal Reserve policymaking in the making,” says Signorelli.
It is rare for central banks to raise rates in an economic downturn. But these same banks have had rates at zero, or near to it, when the economy was humming. That’s mainly because inflation was around 2% on a good day. Today it is closer to 9%, with some items like food as high as 10% versus a year ago.
“Hawkishness with interest rates is being mimicked elsewhere, like in Europe, India, and Brazil ,” Signorelli says. “It’s never good to see half the world’s central banks deciding their best efforts should now focus on curbing economic growth.”
World Bank President David Malpass recently warned central banks to turn back or a big global recession loomed for next year. It might be better to focus on encouraging production and economic growth.
The two-year Treasury says Wall Street — and lenders — think it’s time for a breather.
Source: https://www.forbes.com/sites/kenrapoza/2022/09/16/two-year-treasury-spikes-signaling-severe-economic-slowdown/