Analysts spooked as a key sign of a recession 'blares loudest' alarm since 2007
Economic analysts were spooked Monday as the Dow Jones Industrial Average dropped more than 800 points and other key stock indices plunged in the worst fall of 2019. The drop came amid the turmoil of President Donald Trump's ramped-up trade war with China.
China's currency dropped to the lowest point in a decade, the Associated Press reported, following Trump's announcement last week that he would move forward with a new round of tariffs.
Bloomberg reported in a story headlined "Yield Curve Blares Loudest U.S. Recession Warning Since 2007":
The latest eruption in the U.S.-China trade dispute pushed a widely watched Treasury-market recession indicator to the highest alert since 2007.
Rates on 10-year notes sank to 1.73% on Monday, close to completely erasing the surge that followed President Donald Trump’s 2016 election. At one point, they yielded 32 basis points less than three-month bills -- that’s the most extreme yield-curve inversion since the lead-up to the 2008 crisis -- though now that gap has since narrowed again slightly.
As I previously reported:
Basically, the yield curve reflects the relationship between the yield of Treasury bonds over different lengths of time. Usually, the yield on a bond — the interest that will be paid after the bond’s term — is larger the longer the term is. But in an inverted yield environment, as is beginning to emerge, the three-month yield can actually be higher than the 10-year.
It’s not that the inverted yield curve triggers a recession. The curve is just determined by the bond markets. What it does is give us a glimpse into the what investors are expecting for the future — and when the curve is inverted, it means investors are nervous.
Trump's volatility and the deteriorating negotiations with China give investors good reason to be nervous. And just last week, Chair Jerome Powell announced that, due to signs of weakness in the U.S. business climate and the risks of the trade war, the Federal Reserve will be cutting interest rates for the first time since the 2008 recession.
Of course, the risk of a recession doesn't really matter because it hurts investors. Recessions matter because they can be devastating for the economy as a whole.
Economist Paul Krugman noted that Trump wants to blame China for the stock market drop, but he has no one to blame for himself.
"Trump is already screaming 'currency manipulation' about the drop in the renminbi. But he just slapped a bunch of new tariffs on China. What did he expect to happen to the currency?" Krugman said on Twitter.
He even offered a troubling warning of his own: "Hope I'm wrong, but in retrospect Trump's latest tariffs may look like the world trade equivalent of the assassination of Franz Ferdinand — the event that tripped an uneasy situation into all-out trade war."
Economic analyst Catherine Rampell mockingly noted that Trump had claimed a trade war would be "easy to win":
trade wars are good and easy to win https://t.co/C1pnl237Up— Catherine Rampell (@Catherine Rampell) 1565026224
"Downside risks are increasing for the global and U.S. economy as the trade dispute between Washington and Beijing escalates with no resolution apparently in sight," Mark Hamrick, senior economic analyst at Bankrate.com, told me. "As the July jobs report demonstrated, the U.S. economy is slowing. The next round of tariffs, if imposed as threatened by the president in September, begin to target the U.S. consumer. That puts the 11-year-old economic expansion at risk. Uncertainty has been primarily a concern for American business. Now, the risk is that uncertainty drifts from business and financial markets to infect individuals."
He added: "Investors have been betting that the Federal Reserve will do what it can to provide a backstop to the U.S. economy by cutting interest rates. But there's only so much benefit that monetary policy, or rate cuts, can provide in the face of these burgeoning trade issues."