The 2-10 spread is receiving lots of attention since the yield curve is now inverted more than 100 basis points at -102. The 2-year yield is up to 4.75% with the 10-year yield at 3.73%. Hence, 4.75-3.73 = 1.02 percentage points, or 102 basis points, or 102 bips. An inverted yield curve is a precursor to a recession.
As previous 2-10 spread charts have shown, here is a link that discusses the saga this year with the charts along the way, the hook pattern is what bring on the recession not the initial foray lower with a more inverted yield curve. However, the hook pattern must be sustainable and continue higher to lock the recession in.
You can see the first tease early last year but the 2-10 spread recovered, and then re-inverted in June/July (last summer). More hook patterns occur announcing a recession but then no, the hook fails and the 2-10 spread drops lower nullifying the recession call.
Starting in March of this year, a couple-three months ago, the hook forms again and the thinking is that this is the real deal since the inversion went past 100 bips which is record levels. The hook forms and heads higher but again, the 2-10 spread travels sideways, then drops. Pope Powell and the Federal Reserve's policy decisions send the 2-year yield strongly higher to the 4.75% level which accounts for most of the drop in the 2-10 spread.
Note that after the stall in late March and April, the spread rises again and threatens to break-out higher again and continue the hook pattern higher. That was a key week (5/1/23). You can see the long upper shadow tapping on that upper resistance but then failing and the 2-10 spread then collapses to the current lows. Write that -0.4 percentage points, or -40 basis points, on a sticky note and put it on your forehead. This number is key once the spread recovers higher to form the new hook shown on the right hand side. When the hook travels higher and then takes out the -40 basis points level headed to -20 basis points, the recession will be locked-in and coming fast.
The purple lines show universal positive divergence with all the indicators as the 2-10 spread makes lower lows. The spread is loaded up with fuel and on the launch pad ready to start the new hook pattern higher. The RSI and stochastics are oversold agreeable to a bounce. The 3-month action shows a falling wedge pattern which is bullish (the spread should move higher from here). The spread is also below its moving average ribbon requiring a mean reversion higher.
The 2-10 spread taps on the lower standard deviation band so the middle band, that is also the 20-wk MA, at -0.68 bips, is on the table. The pink boxes on the ADX show that the move higher in the spread in 2021 was a strong trend higher but that petered out in September 2021. The downside move in the spread is verified to be a strong trend starting 2022 but the strong trend lower in the spread faded in April a couple months ago. This action hints that the spread is ready to recover higher forming the new hook which is likely the real recession hook this time.
If you are a young person, prepare yourself financially, mentally and emotionally for losing your job in the weeks and months ahead, or your significant other or spouse losing their job, or both of you losing your jobs. Understand that no matter how much you like your boss and job, you can be sh*t-canned in a heartbeat and no one will even miss you. What will you do? Do you have savings? Unemployment compensation does not last forever. Save your money. Don't be stupid. The cushy life you have had floating along the quiet calm river for many years is now turning into whitewater rapids. You may have to hang on for dear life by the end of the year. This information is for educational and entertainment purposes only. Do not invest based on anything you read or view here. Consult your financial advisor before making any investment decision.
Note Added Friday Morning, 6/23/23, at 11:05 AM EST: Treasury Secretary Yellen pooh-pooh's the talk of recession. Janet looks under the buffet table and opines, "Nope, no recession here." She looks behind the curtains and announces, "No recession here, either." Yellen says the house construction and retail sales data remains strong and the labor market is resilient. Well, she needs to look at Unemployment Claims over the last 3 weeks. Meanwhile, Eurozone PMI's sh*t the bed some falling back into contraction. Ditto Japan. The eurozone manufacturing weakness sends the euro lower and US dollar index higher sinking US stocks. European chemical companies are taken to the shed behind the garage and beaten mercilessly. If the economy does not need resins, chemicals and paints, well, you do not have a recovery, you have a sick economy going forward. As they said in The Graduate, hello Mrs Robinson, you look lovely today, the key word is "plastics." Profit warnings from the chemical industry are bad news. The services sector is rolling over in Europe (generally, right now in the US and Europe, goods are disinflationary and deflationary while services remain inflationary but probably for not much longer; services will roll over and join goods). Automaker Ford announces new layoffs. How's those glorified golf carts (EV's) going, buddy? What idiot buys an EV when there is a gas station on every corner? The auto golf carts do not work in a power outage or natural disaster. Buy yourselves some good walking shoes if you buy an EV. In a power outage, you will be stuck at home unable to go anywhere, with a 1-ton hunk of junk sitting in the garage, unless you walk. A gasoline car can get you coast to coast effortlessly if you decide to take a trip on a whim. An EV requires pre-planning of your trip; 'good luck wit dat EV, sucka', as they say in the Bronx.
Note Added Saturday, 6/24/23: Federal Reserve data indicates a 71% chance of recession the highest numbers ever and in the past, a recession has occurred within 12 months every time. This activity has been ongoing so the recession will be here, say, by April 2024 or sooner. Thus, the US will be in recession either now going into and through Q3, or Q4, or Q1 2024. Choose your poison. The chart above hints that the recession will be here sooner not later so Q3 (July, August, September) and/or Q4 (October, November, December). Keystone will end up with nothing in his Christmas stocking this December not even the typical chunk of coal.
Note Added Sunday, 6/25/23: The US PMI is 53.0 slipping lower but remaining above the 50 level that separates economic expansion from contraction. The manufacturing recession continues with the US Manufacturing PMI at 46.3. Services PMI is holding-up at 54.1 as long as America's upper middle class and privileged elite, that screwed everyone else over the last five decades, keep spending money.
Note Added Thursday, 6/27/23: The Case-Shiller index falls year-on-year for the first time in 12 years. The home-price reset phenomena is over. Home prices are dropping. New Home Sales pop +12.2% on-month and +20.0% on-year. People that need a home, and have the money, have to build one since folks are remaining in their houses enjoying a low mortgage rate (they do not want to move and end up with a far higher mortgage rate). Analysts and television pundits proclaim a housing recovery is in progress and there is nothing but blue skies and rainbows ahead.
Note Added Wednesday Morning, 6/28/23, at 6:16 AM EST: The Ford layoffs include engineers. Not good. Google is laying off employees. The tech layoffs are mounting including Mister Softy (Microsoft), Scamazon, Google and dozens of smaller firms and start-ups. When the economy fades, the start-ups and other research-type projects are first to get axed and the employees on these projects are sh*t-canned. If you are working now, make sure you do not charge any time to overhead; if you do, you will be laid off. If you have a few hours of time that cannot be charged to a client or customer, ask your boss for more work since that may keep you off the layoff list a bit longer. Even if the work is not there to give you, the boss will remember that you showed initiative and he may keep you around a bit longer. Banking giant UBS, merging with Credit Suisse, announces that one-half the workforce at CS will be canned. Ford, General Motors and other automakers are laying off workers. When the engineers are axed, that signals recession. The engineers and tech jobs are high-paying so consumer spending takes a hit. What people forget about at the start of recessions, is the impact that layoffs have on society and the workers that still have jobs. The day after a company announces layoffs and kicks workers to the curb, the boss calls a meeting for the workers remaining and tells the b*tches to pick up the pace and perform the work of the sh*t-canned workers and not moan about it. Anyone complaining will be next in line to be axed. Neighbors and relatives hear that smart Johnny lost his job and wonder if their jobs are in jeopardy. People will cut back on spending for fear of losing their jobs even if they have a secure job. This pullback accelerates the recession and things fall apart quickly. It typically starts going downhill fast with the recession monster starting to growl strongly when you hear that engineers, accountants, tech workers, programmers and other highly-paid employees are canned.
Note Added Wednesday Evening, 6/28/23, at 7:06 PM EST: Federal Reserve Chairman Powell, at the central banker meeting in Portugal, proclaims, "....it's so uncertain right now, in my view, the least unlikely case is that we do find our way to better balance with without a really severe downturn." Huh? Powell continues, "I think there's a, there's a, significant probability that there will be a downturn as well though, but that is not to me the most likely case." Say what? Can you make sense of that? Whatchu talkin' 'bout Willis? Powell is a traditional two-handed economist. On the one hand, and then on the other hand.... If he expects a recession, why is he raising rates? The world is in uncharted waters but each central bank claims to own the correct map for the path forward.
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