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The bond market sent a warning, and this time the stock market has been listening. Investors will be looking for clues over the coming week that policymakers will also listen to.
The 10-year US yield on Wednesday was briefly traded below the 2-year note yield, marking a reversal of the yield curve – a phenomenon considered to be an often reliable indicator of recession, but with a higher average lag than one year. In fact, the yield on 10-year bonds is lower than the yield on three-month Treasury bills since the end of May – a reversal of this part of the curve is seen by economists as an even more reliable indicator of recession .
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But the latest rebound came amid a series of gloomy economic data from Asia and Europe, as well as an intensification of the trade war between the United States and China.
"Shot of warning"
The latest reversal does not guarantee the catastrophe, but it is "a warning sign of the evolution of the situation in recent months," said Joe Mallen, investment director at Helios Asset Management, which manages an asset $ 16 billion in advisory funds in an interview.
"At a very high level, people are really really concerned about a recession in the United States in the next two years, and I think it's fair," he said.
Related: For equities, "buying the trough" may become a "losing proposition", says UBS
It was a volatile week for the stock market. The Dow Jones Industrial Average
DJIA, -2.37%
fell 800 points, or 3.1%, on Wednesday, which corresponds to its largest one-day percentage decline in 2019, while the S & P index
SPX, -2.59%
fell 2.9% at the reversal-inspired sale. Shares rose mostly on Thursday, then recovered much of the ground Friday, but still fell for the week. The S & P 500 saw a 1% drop in weekly, while Dow dropped 1.5% and Nadsaq Composite
COMP -3.00%
was down 0.8%.
Stock Index Futures announced a higher start on Monday, fueled by President Donald Trump's optimistic comments on trade negotiations, as well as China's decision over the weekend to cut costs for the first time. business borrowing.
The 10-year / 2-year curve closed the week with a slight rise after Wednesday's brief reversal. But stock investors have also been frightened by the size and speed of the recovery of Treasurys, a popular hideaway in times of uncertainty. Yields, which go in the opposite direction of bond prices, have fallen sharply to multi-year lows or, in the case of 30-year Treasuries
TMUBMUSD30Y, -2.03%,
a historic low, plunging below the 2% mark for the first time in its history before ending the week at 2.001%.
A global story
Of course, the movements in the treasury market do not affect all – or perhaps even primarily – the US economy. This speaks volumes about the view that the Treasury's recovery is excessive and vulnerable to a pullback that could lead to a rebound in short-term returns.
"The bond market rally is as much a global story as the American one," said Kit Juckes, a global macro strategist at Société Générale, on Thursday, pointing out that weak data in Asia and Europe was behind the recovery. Treasury. dragged down returns on Wednesday. "But at some point, US data must justify the fall in US yields, or at least some of them more important than recent data."
The increasing supply of debt in the world offering negative returns – the yield curve of German government bonds as a whole is now in territory less than zero – means that the Treasurys remain attractive even if their yields are close to their lowest level.
See: ECB ready to put in place "very strong" stimulus package, says politician
This factor is one of the reasons why some investors believe that inverting the yield curve might not offer as reliable a signal as in the past about the economic outlook. But these external factors could be of limited comfort.
interview: Central banks "go down" means the stock market will do "very well": Mark Mobius
"In short, the markets are worried that the United States will be dragged into the very low / negative rate vortex that consumes European sovereign debt," Nicholas Colas, co-founder of DataTrek Research, said on Thursday. "The signal that sends: a deflation in the Japanese and economic stagnation of the euro area. Not good."
On the other hand, low Treasury yields should be positive for equities, in general, from a valuation point of view. And a record 30-year bond yield should be positive for housing.
Focus on the consumer
But the main concern of stock investors lies in the American consumer, who remains a mainstay of the economy, said Mallen.
Indeed, July's retail sales data and the upbeat results of Walmart Inc. are stronger than expected.
WMT, -0.97%
were credited with stabilizing stocks after the rout inspired by Wednesday's reversal. But increased fears of recession can become a self-fulfilling prophecy if consumers reduce their spending.
All eyes on Jackson Hole
This puts the burden on the Federal Reserve and President Jerome Powell. Representatives of the Fed and some of the world's biggest monetary policy makers are meeting in Jackson Hole, Wyoming, starting Thursday.
Analysts and investors have said the Fed could calm the nerves of consumers and investors – although it's probably not Trump, who constantly blames her for what he sees as insufficient speed to cut rates – if Powell and other decision makers engage it. in some market-oriented hand held.
Look also: Investors Could Be Disappointed by Jackson Hole Fed's Message
A quarter rate cut by the Fed in September would likely be a disappointment, Mallen said. A sign that the Fed is ready to be "a bit more aggressive" in the light of recent developments in the yield curve could reassure.
"Comments or the absence of comments from the Fed will probably move markets in one way or another," Mallen said.
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