Recession risk
Right about when the world woke up from the ‘inflation is transitory’ narrative and started adjusting rates, recessions were priced in across the globe. It was assumed that the central bank action to raise interest rates in the face of inflation would ultimately have a costly impact upon growth rates further down the line. However, since then data has consistently shown most developed economies staying above the recessionary 0% growth line. Accompanying that set of data has been a growing set of new forecasts that show most developed economies now avoiding a recession, at least for now.
One of the best predictors of a recession has been the spread between shorted dated, say 2-year, and longer, say 10-year, maturity bonds. This is known as the 2s/10s spread. Where the yield implied by the price of the shorter dated bond is higher than that of a longer dated bond, you can reasonably infer that the market is pricing in a recessionary period ahead. Due to the rapid tightening cycle that most central banks have embarked upon and are now reaching the pinnacle of, the yield curve underlying most economies globally is inverted. So, does that mean we are due a recession? Well, not necessarily, and at least predicting when is a very grey area from the perspective of this particular indicator.
Taking a look at the equity market shows that as of yesterday, thanks to a 20% rally in just over 6 months, the S&P 500 has been brought back to a bull market. This equity rally has added evidence to those claiming the market downturn has peaked and is now behind us. The Fed, expected to pause its hiking cycle at its latest meeting concluding tomorrow, has also been supporting this view implicitly through its rate setting and narrative choices. Volatility indicators and equity prices are certainly not pricing in a recession, however, there are still elements of the bond market showing signs of stress.
Discussion and Analysis by Charles Porter
Click Here to Subscribe to the SGM-FX Newsletter
Related Insights
Daily Brief – Now that’s what I call Tariffs
Charles Porter
Thu 3 Apr 2025
Now that’s what I call Tariffs The title of this briefing is an homage to that (n)ever-popular publication of CDs (formerly vinyl) that seemed to be everywhere when I was growing up. Containing the ‘best’ hits of a particular year, you never seemed to be far from a ‘now that’s what I call’ CD (or […]
Daily Brief – Holding on
Charles Porter
Tue 1 Apr 2025
Holding on With less than a 10% probability of a cut priced into the Reserve Bank of Australia’s (RBA) latest monetary policy decision, it is unsurprising markets open today to news of a hold. The RBA adopted a lower peak rate of benchmark interest than the likes of the UK and USA with lower inflationary […]
Daily Brief – What is the Mar-a-Lago Accord, and should markets care?
Charles Porter
Tue 25 Mar 2025
What is the Mar-a-Lago Accord, and should markets care? At heart, the Mar-a-Lago Accord is a proposal for President Trump to weaken the US Dollar. As we know, Trump’s typical deregulatory and risk-inducing persuasion would, all other things equal, increase demand for the US Dollar. As far as the relationship between perceived risk and the […]
