The yield curve/recession predictor saga lingers on like the stink of garbage on a hot August day. Waiting for the recession is like waiting for Godot. It is the Godot Recession. However, some of the mocking of the yield curve as a recession predictor is unwarranted. Typically, as the yield curve dis-inverts, the recession is at hand. A prior chart, linked here, explained the yield curve drama. Every time over the last 2 years when the 2-10 spread started moving higher (less negative), it got smacked back down. This is why the recession has not yet appeared. Also, a recession usually appears 18 to 24 months after the inversion which targeted the December 2023 to July 2024 window, but we are only a couple months right-translated from this target.
The funny thing about a recession is that you do not know you are in one until you are already in it (like stepping in dog sh*t). As the months and year or so play out going forward, data is revised and the economic Einstein's will proclaim that guess what?, remember during the summer and early Fall (now), we were actually in a recession. It will be interesting to see if the economy and markets fall off a cliff going forward.
In the past, as previously explained in the prior housing recession chart, housing and autos dictated a recession. If these two sectors went south, bye-bye, a recession begins. In 2024, these two key market parameters take on a second tier importance overrun by semiconductors, that now rule the entire roost, and the wealth effect, courtesy of the Federal Reserve's money-printing that made the wealthy filthy rich, that is driving big consumer spending by the well-to-do that is keeping the economy afloat.
The elite privileged class and upper middle class sycophants that live in McMansions and service the wealthy, are sitting on huge stock market gains since 2009 wondering why everyone else is so glum? One-half of the consumer spending currently is due to the upper 20% of the population, the have's that control the rigged game. The other 80% (common Americans) are rubbing two nickels together hoping that the Publisher's Clearing House guy shows up at the front door with a big cardboard check.
Anyhoo, the yield curve, the 2-10 spread, inverts in March 2022 but that was short-lived. In late June 2022/early July 2022, the inversion occurs again and it is for real this time. Most folks expected recession in 2023, including Keystone, but alas, the Godot Recession was born.
The yield curve was inverted for over 2 years; it was inverted 26 months to be exact, the longest period in history, until 8/5/24. The yield curve dis-inverted and Keystone got up for a cup of coffee but when he got back it was inverted again. What? Who? Where?
The spread played around at the critical -0.13% resistance level during August, that now serves as support, and the spread makes its way to dis-inversion again. At 10:03 AM EST, the 2-year yield was 3.785% and the 10-year is at 3.787%. Bingo. Old guys say 'bingo' a lot. The yield curve (2-10 spread) dis-inverts to +0.002%; the second dis-inversion in the last month. The 3.78%-3.79% level is where the 2's and 10's meet. It does not last. Blink your eyes and the yield curve is inverted again now negative below zero.
The expectation is that the recession is so close you can taste it. The US is currently in manufacturing, housing and labor recessions but no overall US recession yet since semiconductors, the new most important sector, and the wealth effect spending by the have's, are keeping the economy afloat creating the Godot Recession.
When the spread dis-inverts and normalizes, the first upside target will be the 200-week MA at +0.10%. The long 2-year inversion saga has an inverted head and shoulders (H&S) vibe to it. Thus, with a neckline at -0.13, and head at -1.03, that is 0.90 difference so adding that to the neck is +0.77% as the upside target now that the neckline has given way to the yield moving higher. Interestingly, the 0.77% is resistance and congestion from late 2021 early 2022 and serves as a magnet for the yield curve.
The US Monthly Jobs Report on Friday morning will likely dictate the Fed decision on 9/18/24. If the unemployment rate drops to 4.2% as expected, or lower, the 25-bip is likely, but if the rate jumps higher above 4.3%, the 50-bip cut is likely on the table. Powell may commit to the 25-bips thinking this will be a slow and steady course but that thinking could lead to the ...... policy error....... growth scare..... danger, Will Robinson....... danger ..... because if the economy is actually deteriorating quickly, Powell will have to jump to 50-bip cuts or more and that will signal confusion and market mayhem as traders realize he has lost control of the market ship. The Fed's credibility will be in question.
Powell is trying to play it cool and plans on performing the song "You're So Impatient" by the Pixies at the 9/18/24 meeting for everyone that is in a rush to cut rates. It does appear that if there was a mistake and policy error, it would be likely that the Fed waited too long to cut rates. We will know the answer over the next month or two. Powell may be coming upon his Waterloo if he waited too long to cut rates. 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 Thursday Morning, 9/5/24, at 5:08 AM EST: The 2-year yield is 3.77% and the 10-year yield is 3.77%. The 2-10 spread (yield curve) sits on top of the zero line not knowing whether to stay inverted or make its way higher and commit to dis-inverting and normalizing.
Note Added Thursday Morning, 9/5/24, at 5:34 AM EST: The 2-year yield is 3.76% and the 10-year yield is 3.76%.
Note Added Thursday Morning, 9/5/24, at 6:20 AM EST: The 2-year yield is 3.768% and the 10-year yield is 3.767%. The yield curve is inverted by a single hair; -0.001%.
Note Added Thursday Morning, 9/5/24, at 8:06 AM EST: The 2-year yield is 3.7600% and the 10-year yield is 3.7627%. Bingo. The yield curve is dis-inverted by three hairs; +0.003%. The yield curve drama continues with three days of dis-inversions occurring over the last month; 8/5/24, 9/4/24 and 9/5/24. The Godot Recession pokes his head up out of the bushes and starts peeking in windows.
Note Added Thursday Morning, 9/5/24, at 8:22 AM EST: The 2-year yield is 3.723% and the 10-year yield is 3.738%. The yield curve is dis-inverted at +0.015%. The ADP Jobs data lays an egg with only 99K jobs versus the 145K expected hinting that the labor market is starting to weaken faster than expected.
Note Added Thursday Morning, 9/5/24, at 8:22 AM EST: The 2-year yield is 3.72% and the 10-year yield is 3.73%. The separation is at one bip now. Houston, we have separation. Houston, we may have a recession problem.
Note Added Thursday Morning, 9/5/24, at 8:22 AM EST: The 2-year yield is 3.73% and the 10-year yield is 3.74%. The Claims data is better than expected with 227K versus the 230K expected. Ride My See-Saw.
Note Added Friday Morning, 9/6/24, at 5:25 AM EST: The 2-year yield is 3.716% and the 10-year yield is 3.704%. The yield curve is inverted by one basis point (0.012%). Will there be a third consecutive day of intraday dis-inversion? The critical US Monthly Jobs Report is on tap in 3 hours. The jobs circus is coming to town. If you listen closely, you can hear the calliope.
Note Added Friday Morning, 9/6/24, at 8:46 AM EST: The 2-year yield is 3.66% and the 10-year yield is 3.69%. The yield curve has dis-inverted, or normalized, to plus 3 basis points the third consecutive day of dis-inversions. The jobs report disappoints on the headline jobs number and with prior revisions, but the rate drops from 4.3% to 4.2% as estimated. Index futures bounce around after the report that has something in it for everyone. Futures say there is a 50/50 chance of a 50-bip cut in 12 days. Check this out. The unemployment rate last month was 4.253% and rounded up to 4.3%. Today's rate is 4.221% rounded down to 4.2% providing the 10 bips of separation but in actuality, the two rates over the last month are only 3 bips, or 0.032%, apart. The wages beat by a tick on the month to month and annually so the inflation folks are waving these numbers in the air proclaiming persistent inflation ahead. Wages are key. That is why it was comical to hear folks clamoring about inflation from 2009 on, when quantitative easing started, but inflation was on a milk carton (missing) for many years. The wages did not go above 4% so you knew inflation was not going to be a problem and it was not. In recent years, however, wages jumped above 4% fueling inflation. The annual wages had fallen back below 4% and this morning's number maintains that trend at 3.8% annual wages. This is not a problematic number for inflation. When annual wages are above 4.0%, that is the time you start to factor in inflationary concerns and if wages tag 4.5%, inflation is guaranteed going forward. We are not in this situation now. This is why the Fed is worried about the labor picture more than inflation. The SPX will probably stagger around 5500-5520 until it decides which side to exit.
Note Added Friday Afternoon, 9/6/24, at 2:40 PM EST: The 2-year yield is 3.65% and the 10-year yield is 3.71%. The yield curve has dis-inverted, or normalized, to plus 6 basis points. The spread ends the week at +0.06% the first close above the zero inversion level since 7/1/22; that's a big deal. The 2-year yield drops to 3.65% the lowest since March 2023 and September 2022. The 10-year yield also drops to 3.65% the lowest since June 2023. Creepy Mister Recession is knocking on the back door and wants your bag of sugar and this time it is No More Mr Nice Guy. Cool, Orianthi was on tour with them then. The consensus is that Powell will stick to the 25-bip cut in 12 days but this may lead to a policy mistake. The next FOMC meeting after 9/17/24-9/18/24 is in November. Thus, if the economy and markets go off a cliff a couple days after the 25-bip cut on 9/18/24, the Fed will have made a policy mistake (they should have likely started the cuts sooner, maybe in July, or go stronger on 9/18/24 with a 50-bip cut). If the economy and markets hang in there this month and through October, Powell will look like a genius with a 25-bip cut. What will be the outcome? Will Powell stick with the 25-bip cut? Can America's have's, made filthy rich by the Fed's obscene decade and a half of money-printing, continue to support the economy and stave off the recession, or will they join the have-not's and opine about the way things used to be while standing in the unemployment line? The stock market tanked yesterday the SPX collapsing 95 points, -1.7%, to 5408 exactly at the 20-week MA support at 5406; time to bounce, or die. The 100-day MA is 5379 and typically acts as interim support when price is dropping.
No comments:
Post a Comment
Note: Only a member of this blog may post a comment.