Some strategists say the recent yield- curve inversion may not be a sign of recession, or at least not an imminent one, and that this time might be different.
On early Wednesday, the 10-year Treasury dipped below the 2-year rate, an inversion that signals what many economist and strategists widely believe to be a negative economic sign and recession indicator. The last time investors had to contend with an inversion like this was 2005.
Some strategists, however, pointed to the strong retail sales report out on Thursday morning as a sign that things may not be as bad as they seem.
“This is not what a recession looks like. We know. We checked it. The rule of thumb for recession is three consecutive months of declining retail sales, ” MUFG Managing Director and Chief Economist Chris Rupkey said in an email.
“Instead, retail sales are soaring with sales jumping 0.7% in July and non-auto retail sales up 1.0%,” he said.
One analyst said that Wednesday’s brief inversion is not indicative of anything and that the fear mongering needs to stop.
“The yield curve matters when it inverts over a several-week, if several-month, time period. We had an interday inversion. In 1998, we had a 27-day inversion,” BMO Chief Investment Strategist Brian Belski said on CNBC’s Fast Money Halftime Report.
“Just because everyone thinks we’re going to have a recession doesn’t mean we’re going to have one. Saying we’re going to have a recession is saying the sun is going to come up tomorrow. Of course we’re going to have a recession at some point,” he added.
Other strategists agreed that investors are jumping to conclusions too quickly.
“Bond yields signal recession risk, we say not so fast,” UBS said in a note to clients.
The firm said there are many other factors to consider not just the inversion itself.
“Instead, its signal about the health of the economy is what matters, and it is not as negative as some investors fear,” they said.
“The length of time the yield curve is inverted, and how much is inverted, matter. If Fed rate cuts successfully steepen the curve comfortably into positive territory, this brief curve inversion may be a premature recession signal.”
Here’s what else strategists say about what the yield curve tells investors:
“Bond yields signal recession risk, we say not so fast. … Unlike trade conflicts, an inverted yield curve by itself has limited economic impact. Instead, its signal about the health of the economy is what matters, and it is not as negative as some investors fear. For one, there’s been a long and variable lag between initial inversion and the start of recessions: 22 months on average, ranging from 10 to 36 months for the last five recessions. In addition, Treasury yields are being weighed down by the almost USD 16 trillion in sovereign bonds globally with a negative yield, distorting their signal about US economic activity. Finally, the length of time the yield curve is inverted, and how much is inverted, matter. If Fed rate cuts successfully steepen the curve comfortably into positive territory, this brief curve inversion may be a premature recession signal.”
“The contradictions in the shape of the US yield curve versus the economic data and credit conditions has been reinforced by two other variables – risk aversion and the carry trade. The former has been caused by the grinding US-China trade dispute and the latter by the interest rate differential between the US and other developed markets. In turn, this has underpinned the US dollar and money markets with last week’s inflows running at the same rate as last December. Moreover, August historically produces the worst monthly returns.”
“Inverted yield curves in the US and elsewhere tell us very little about the timing of future downturns and, for now at least, the economic data are more consistent with a slowdown than a downturn in the world economy.”
“Damn the trade war torpedoes sowing the seeds of uncertainty, it is full speed ahead for the American consumer as they pull out all the stops to keep the economy humming as we start the second half of the year. This is not what a recession looks like. We know. We checked it. The rule of thumb for recession is three consecutive months of declining retail sales. Instead retail sales are soaring with sales jumping 0.7% in July and non-auto retail sales up 1.0%.”
“Inverted yield curves are depressing risk appetites, but the U.S. consumer remains strong. Unemployment and inflation are low and wage growth is stable, supporting consumption, which accounts for roughly 70% of GDP. A recession is unlikely as long as consumption growth remains robust. That being said, if consumer confidence follows uncertainty equities will face more serious headwinds.”