A key recession indicator suggests the Fed may slash rates soon
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Phil Rosen
Mar 30, 2023, 16:55 IST
WASHINGTON, DC - SEPTEMBER 26: Federal Reserve Board Chairman Jerome Powell arrives for a news conference on September 26, 2018 in Washington, DC. The Fed raised short-term interest rates by a quarter percentage point as expected today, with market watchers expecting one more increase this year and three more in 2019.Photo by Mark Wilson/Getty Images
Howdy readers. Phil Rosen here, writing to you from Manhattan.
While scientists delight in the thrill of discovery, markets are in a more sour mood. There's another bond market signal flashing and it could mean the Fed's about to step in.
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1. If a recession does indeed arrive in 2023, it will conclude an absurdly long run of expert and technical forecasts that have been predicting a downturn since early last year.
We write a lot about bond yields flashing recession indicators, and there are a few that are closely watched and reliable signals, such as the difference between the 2 and the 10-year Treasury, which has been inverted for about a year now.
But there are other bond market signs, too, and the recent rally in bonds at the shorter-term end of the Treasury curve may just be the indicator with the most troubling track record.
August 2007 and September 2008, during the Great Financial Crisis
October 2002, the final month of the bear market during the dot-com bubble burst
In each of those cases, the Fed ultimately stepped in quickly to slash interest rates.
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This, according to DataTrek, is bad news.
"The default scenario baked into asset prices is based on the Fed pivoting – quickly – to lowering policy rates," DataTrek's Nicholas Colas said. "That can only mean a recession is close at hand, one that would reduce inflation and be steep/deep enough to force the Fed to act."
In effect, the bond market is telling us that the Fed could be on the brink of making a policy pivot as the economy falters.
The stock market would welcome lower rates, but the move by the central bank would be in service of stimulating the economy in the event of slowing growth.
Remember, in the name of fighting inflation, the central bank has pushed interest rates to the highest they've been since 2007, and these moves have threatened to tip the US economy into a downturn.
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But the latest CPI reading put inflation at 6%, well above the Fed's 2% target — which suggests a choppy road ahead for policymakers, markets, and the economy.
What recession indicators are you watching these days? Do you think the US will enter a downturn this year? Tweet me (@philrosenn) or email me (prosen@insider.com) to let me know.
In other news:
2. US stock futures rise early Thursday in a further sign fears of a banking crisis are easing. Investors are shifting focus back to the Fed's thinking on interest rates, with a PCE inflation update due Friday. Here are the latest market moves.
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3. On the docket: Bank of China, Manchester United, and more, all reporting.
5. Recent moves by the SEC and CFTC may indicate just the start of a wider crypto crackdown. High-profile events like FTX's crash and the implosion of TerraUSD last year have made new regulation inevitable, compliance experts told Insider. As a result, markets could face more volatility and price swings.
9. JPMorgan shared four charts that put the banking crisis into perspective. The financial turmoil has roiled investors, but it's still possible markets avoid a crash — and the downturn in tech may be nearing its end.
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