The Yield Curve Inversion: A Reliable Predictor of a Recession

Dear esteemed subscribers,

We hope this message finds you well. Today, we bring you an update on the current state of the economy, particularly about the bond market's recent behavior and its potential impact on the likelihood of a recession.

As you may be aware, the bond market has been flashing warning signals of an impending recession for some time now. In fact, it has preceded every recession since 1960. While economists have been predicting a recession for quite some time, recent events have brought these predictions back to the forefront.

Last week, the Federal Reserve Chairman, Jerome Powell indicated that recent economic data suggests interest rates will likely climb higher than expected. This announcement sent shockwaves throughout the markets and caused the US Treasury yield curve to invert to its deepest level since 1981.

In particular, the yield for 2-year Treasury bonds exceeded the yield for 10-year ones by a significant margin. Whenever the short-term yield eclipses the long-term yield, it's considered an inversion, indicating that investors expect interest rates to rise in the near term, but ultimately damage the economy, forcing rates back down over time.

A yield curve inversion has occurred before every recession since the 1960s, making it a reliable predictor of a recession. While we cannot predict the future with certainty, it is essential to pay attention to these signals and take appropriate measures to protect our investments.

Now, here's a roundup of the latest financial news for the week starting on Tuesday, March 14:

Tuesday: The Labor Department released its February consumer-price index, which is a closely watched measure of what consumers pay for goods and services. Inflation remains a concern as consumer prices rose 6.4% in January from a year earlier, reflecting a slight cooling of still-high inflation. China’s National Bureau of Statistics also released January and February figures on industrial production, retail sales, and fixed-asset investment, which is a measure of infrastructure and equipment investment.

Wednesday: The Commerce Department released February retail sales figures covering spending at stores, online, and at restaurants. Retail spending increased a seasonally adjusted 3% in January from the prior month, the largest monthly gain in nearly two years, following two consecutive months of declines. The Labor Department also released its February producer-price index, which measures prices that suppliers charge businesses and other customers. The index rose 6% in January from a year earlier, compared with the prior month’s 6.5% rise.

Thursday: The Commerce Department released February figures on new residential construction and building permits. Housing starts fell 4.5% in January from the prior month, while building permits inched up 0.1% in the same period. The Labor Department also reported the number of worker filings for unemployment benefits in the week ended March 11. Initial jobless claims rose in the prior week but remained historically low. The European Central Bank also announced its latest interest-rate decision. The ECB raised interest rates by a half-percentage point last month, its fifth large increase in a row, and signaled another half-point rate increase is possible in March.

Friday: The Federal Reserve released February industrial-production figures, which measure the output of factories, mining, and utilities. U.S. industrial production increased 0.8% in January from a year earlier, the smallest annual gain since March 2021. The University of Michigan also released its preliminary reading of U.S. consumer sentiment for March. Consumer sentiment improved last month for the third consecutive month as households became more optimistic about the economic outlook.

Remember: It's understandable to feel uneasy about the current state of the economy, but it's important to remember that predicting the future is not easy. Nevertheless, we must stay informed and take appropriate measures to protect our investments. We will continue to monitor the situation and provide updates as necessary.

We hope you found this financial newsletter helpful. Stay tuned for more updates.

Thank you for your continued trust and support!