Yesterday’s announcement by the Trump administration to delay some of the new tariffs on China it just announced a few weeks ago was initially greeted with relief by equity markets across the globe. This proved to be mistake as reality is dawning and global stock markets are selling off hard just a day later on ever weakening economic data in Europe and Asia and further yield curve inversions.
Call it a major hangover as the reversal in tariffs was not coming from a position of strength, it was coming as a result of global economic reality sinking in, a reality that is making its way rapidly to US shores as well. The collapse in global yields has been a theme since October of 2018 with the US 10 year dropping to 1.6% from its October 2018 high of 3.25%, but only now that the 2 year/10 year yield curve has inverted are the official recession alarm bells ringing. Why? Because every single recession in the past 45 years has seen a 2 year/10year yield curve inversion preceding it.
To believe no recession is coming is to argue that this inversion is defying history. And indeed let’s look at history, because it is now used to argue that this yield curve inversion leaves room for further market rallies to new highs. Does it?
If history is a guide, then the answer is yes but market relevant timing can vary quite a bit and depending on how the data is framed up you can get different conclusions.
The calmer interpretation comes via Credit Suisse:
“A recession occurs, on average, 22 months following a 2-10 inversion. The S&P 500 is up, on average, 12% one year after a 2-10 inversion. It’s not until about 18 months after an inversion when the stock market usually turns and posts negative returns”.
Turns out trade wars are not easy and the global growth picture is accelerating to the downside. Last week the UK announced negative GDP growth for the past quarter. This week it’s Germany announcing shrinking GDP with its 10 year hitting a record negative 0.62% yield and European industrial production having gone negative and China announcing its lowest industrial production growth in 17 years.
All of these are signs that the risk of a global recession is a clear and present danger and hence a sudden end to a trade war, with a attempt at face saving by both sides, could certainly spark a sustained global relief rally that may end up averting a recession at this stage as uncertainty would be alleviated and investment decisions, currently on hold, could be made again.
...the downside is also current context versus history:
We've never faced a recession with so much debt and so little Fed ammunition available and with negative rates still in effect in many places— Sven Henrich (@NorthmanTrader) August 14, 2019
There's no playbook for this.
Historic data will be of little use.
And this is where I caution everyone to rely on history exclusively believing we have time. Do we have time?
We’ve never been in this situation before. Ever. Hence there is no economic model that can predict what will happen next. In fact no economist saw this coming:
No comments:
Post a Comment