NEW YORK – Wall Street raised another hurricane warning against the economy on Wednesday as fears continue to mount that a recession could emerge next year, potentially crashing into President Donald Trump's attempt to win
This time, the warning came from the bond market where investors started demanding more interest on two years' government debt than 10-year debt, an "inversion" of a metrics called the yield curve that last happened in 2007 before the financial crisis.
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It sounds like a crazy financial arcana. But it is an accurate meter. And investors have been tricked.
An inversion in this corner of the bond market has occurred before every recession since the 1950s, which increased the potential for the 2020 election to look more like 2008 when a crater economy dominated the political debate. It can trace Trump's plans to make 2020 more like 1984 when Ronald Reagan ran a "Morning in America" campaign based on faster growth.
"You have a little panic going on here about the state of the economy and the bond market reflects that," said Richard Bernstein, founder of the securities firm RBAdvisors. "The bond market says growth is slowing down and the economy can be much sicker than people think."
Shares resumed their downturn following the inversion of the bond market, with investors wiping out profits that came when Trump announced a suspension of many of the tariffs he planned to slap on consumer goods imported from China including cell phones and laptops on September 1.
Trump on Tuesday delayed most of the tariff until December 15, saying he did not want to risk higher prices during the Christmas shopping season. This seemed to undermine his argument that the Chinese pay for all tariffs rather than US companies and consumers.
In addition to the inversion of the bond market, investors on Wednesday reacted to slower growth in China and Germany. They also noted anonymous administration officials quoted in media reports suggesting the break in the trade war – which followed a phone call between US and Chinese officials – did not signal any warming between the two sides. Dow dropped more than 700 points, over 2 percent, in the dinner trade. The blue chip index remains at a lower point than it was 18 months ago, when the trade dispute with China began in earnest.
The recession warnings over Wall Street, which began to intensify over the weekend, cite several factors that are drawing on an economy that had already lost momentum this year when the effects of Trump's tax cut in 2017 began to disappear. Growth fell to 2.1 per cent in the second quarter and most forecasts are now to soften up for the rest of the year. The federal budget deficit is expected to increase over $ 1 trillion this year, limiting Washington's ability to pump more stimulus to the economy through higher federal spending.
But the biggest feature cited by economists is the uncertainty of trade, which shows up in lower corporate spending. The loss in the Chinese market also hampers the farmers.
The U.S. Federal Reserve, under relentless attack by Trump, reversed course last month, lowering interest rates after a series of hikes aimed at getting politics closer to normal after a decade of near-zero interest rates as a result of the financial crisis. The Fed is expected to cut interest rates at least once again this year and will be under increased pressure following the latest inversion of the yield curve and the stock market box.
Economists also suggest that fear of the recession, which is now going through the bond market, could make the recession more likely. Consumer spending, job growth and wages remain healthy, but when fear of grabbing it can be a powerful driver for depressing economic activity, making both companies and individuals making big investments.
"On the death row for economics, we have another flashing warning light," economists at ING wrote in a note on Wednesday. "We have seen overnight the inversion of the 2-10 year portion of the Treasury yield curve, the first time this has happened since 2007 when the global financial crisis began to bite."
Trump administration officials strongly reject the notion that the United States is heading for a recession. They say that continued strong jobs and wage growth will overcome all the slowdowns caused by trade uncertainty. And they continue to claim that Trump is working hard to overcome long-standing cheating from China in terms of trade.
"There will be no recession," said a senior official at the White House on Wednesday. “The consumer is far too strong, as are jobs and wages. I just don't buy it. ”
Some economists also argue that the inverted yield curve may not mean that the recession will come this time. "This time is different," proponents argue that lower long-term bond yields in the United States – which usually shows that investors believe domestic economic conditions will be worse – are actually part of a global phenomenon. They note that returns are down around the world as central banks move to lower interest rates to try to stimulate growth. This does not imply that the US economy is disappearing. And they warn that economic oppression will become a self-fulfilling prophecy.
"The problem with using inversion and historical history is that the yield curve is not currently a referendum on the path of economic growth in the United States, but rather a function of moving forward worldwide," economists at RBC Capital Markets wrote in a note to customers. "We are not in recession because of this dynamic."
But a more perceptive view is that the inverted yield curve, although not a signal of an imminent recession, is really not a positive signal.
"Of course it is important," Bernstein said. "Whether the recession begins in two weeks, six weeks or two years – or if we are already in one – it is difficult to see how one can become more bullish with a inverted yield curve. "