Tuesday, 18 June 2019 14:20

"Miracles Aren't Coming" - Surefire Recession Signals Everywhere

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Authored by Mike Shedlock via MishTalk,

The strength of inversions widened today. That's a strong recession warning, but it is not the actual recession signal.

Inversions Widen

Today's bond market action is a strong follow-through on Friday's action.

Imminent Signal

The recession imminent signal is not the inversion but a sudden steepening of the curve following a period of inversion.

A comparison of the strength of the inversions today vs 2007 will show what I mean.

Inversions With the 3-Month Note Today

The 10-year, 7-year, 5-year, 3-year, and 1-year notes are inverted with the 3-month T-Bill. The inversion isn't the signal. A sudden steepening of the yield curve following inversion is the "recession imminent" signal.

Inversions With the 3-Month Note 2007

Chart 1 Repeated for Ease in Reading

Signal Discussion

  • Box 1, Box 4, and Box 5 all have the same thing in common: A sudden steepening of the 3-Month to 10-Year and 2-year to 10-Year curve following inversion.

  • Box 2 had no inversions

  • Box 2 and Box 3 show a steepening of the 3-month to 10-year spread but not the 2-year to 10-year spread.

Some are waiting for a 2-10 inversion. Perhaps it does not happen. But even if it does, that will not be the signal.

Watch for a sudden steepening of the curve following an inversion.

How? Why?

That's easy. The Fed will either cut or signal it is about to cut.

Too Late

On August 17, the Fed Cut the Discount Rate by 50 Basis Points

Fed Statement: Financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth going forward. In these circumstances, although recent data suggest that the economy has continued to expand at a moderate pace, the Federal Open Market Committee judges that the downside risks to growth have increased appreciably. The Committee is monitoring the situation and is prepared to act as needed to mitigate the adverse effects on the economy arising from the disruptions in financial markets.

Flashback September 18, 2007

Inquiring minds are investigating the Minutes of the August 7, 2007 FOMC meeting released September 18, 2007.

Amazingly Wrong Points

  • At its August meeting, the FOMC decided to maintain its target for the federal funds rate at 5-1/4 percent. In the statement, the Committee acknowledged that financial markets had been volatile in recent weeks, credit conditions had become tighter for some households and businesses, and the housing correction was ongoing. The Committee reiterated its view that the economy seemed likely to continue to expand at a moderate pace over coming quarters, supported by solid growth in employment and incomes and a robust global economy....

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