'Recession watch' begins for U.S. economy amid trade concerns, yield curve inversion



well else we've been talking about stocks are extending to crimes today bond yields are sparking concerns a weaker economic growth doom apart to trade tensions between the US and China but also some other underlying issues joining us now Yahoo Finance's Emily McCormack with the latest Morgan Stanley Emily out with the note talking about the yield curve inversion and what it could mean that's right so the US economy is in recession watch and those initial warning signs actually started six months ago so that's according to Morgan Stanley analyst Mike Wilson so everyone is fixating on that inversion of the three month and 10 year Treasury yield curves that we see persisting today since that inversion of the slice of the yield curve is a reliable recessionary harbinger but according to Morgan Stanley an adjusted view of the yield curve shows that this inversion actually first took place six months ago starting in November and so that's when adjusting the yield curve for the effects of quantitative easing and quantitative tightening by the Federal Reserve so in the note Mike Wilson said that this quote suggests that the shot clock started six months ago putting us in the zone for a recession to watch since typically an inversion must hold for some time before it's considered a major red flag and if you remember back to marches yield curve inversion of the three month and the ten year Treasury yields that did spark some concern among investors but since that dissipated after just a couple of days many analysts actually shrugged that off but again with this thesis here it's saying that this has been a persistent issue and since that is a sign of a potential downturn in the economy that's what Mike Wilson is focusing on now all right thanks a lot Emily let's turn to our panel on this because as much as any trade headlines this is responsible for what we've been seeing in the stock market over the past couple of days Tendai I know we've talked about the yield curve before do you and do you think that we're gonna get a recession because of this work as a signal as signaled by this yeah so I'm not a fan of the adjusted yield curve I think it's an elegant analysis but we're not living in an adjusted yield curve world right we're living in the in the world where the Fed has conducted QE and you know I guess some QT and Qt has been taken off the table so the Fed is there the Fed is acting and it has real world effects in terms of what's happening in the economy so I guess the idea that we've been six months into an inverted yield curve I'm not very sympathetic to that now let's break this down though we're watching the ten year yield curve come down I mean in 2012 it was at one point five seven percent so we're not at the loads we've seen in the past but we're also watching the two-year come down what does that mean for me as an investor and why do I keep hearing people say this is putting pressure on the Fed to drop its the rated charges banks yeah so this all has to do with the mechanics of you know so when you say the yield curve is inverted what are you really concerned about you're really concerned about banks and lending activity and that's why when the yield curve inverts you see banks off and sell off so what that means is that the yield curve is inverting banks borrow short lend long right and this is so they borrow it the 2-year rate exactly for example or some other shorter term rate but that's spread between the short term and the long term rates is basically their net interest margin or their net interest income that's their profit right it's getting tighter yeah exactly you flip their profit upside down that's off lending they stop lending because less loans are profitable they stop lending there's less leverage in the economy the economy slows so that's the transmission mechanism and that's why you have to be concerned about nobody you can put another way too from the perspective of investors I should be more optimistic and have more clarity on the shorter term than the longer term right in theory what an inversion signals is that the shorter term could be rocky but longer-term you think you're going to be in better economic shape well I guess it's saying in longer term you're going to be in worse economic shape because you're getting less returns longer-term then in the shorter term and that's why people say when it inverts it's signaling a recession sometime in the future because it's saying rates are gonna be lower sometime in the future than they are now okay but it depends on which you're looking at for the inversion the 210 has not inverted right I mean look both are accurate sort of causation metrics for a recession the threes and three-month in the ten year and the twos in the 10s what I like to look at is what is the yield curve doing in relation to everything else so we're seeing headlines that the ten-year Treasury yield is at its lowest level since September of 2017 at that point the S&P 500 was at about 2,500 so that about 8% lower than where we are now so my worry is the bond market in the stock market now are much wider than they were in September of 2017 and so does the sp500 need to kind of reprice does it have to get closer on the same page as the bond market and if so could that portend to further declines in stocks or could you look at it the other way and say well lower interest rates are good for stocks they make stocks more attractive and a big theme of last year was worried about the 10-year Treasury yield going to 3% and what that would mean for stocks




Comments
  1. Hardcore Absolute Fact: USA " has been " in a recession since 2007 economic crash! USA has had no growth economically for 13 years with wages chronically low, job quality leading Americans to health problems and suicide! Middle class no longer possible! People cannot afford to start families, buy homes, barely can get a decent car, pap check to pay check on temp work! Consumer spending is dropping like a rock because ONLY basic needs are mostly being bought! US government literally has been sodomized by pure evil corporations a banking cartel systems!

  2. if these bastards crash the economy, i hope it's Bernie that wins the election and forces these bastards a 40-70% tax and nationalized companies

  3. After war/recession, a long cheap credit period in overheated market with global slowing and too much debt, culminating in a trade war; this sounds familiar. Fiscal policy, MMT, will be only option, once again. New, New Deal- so who will be the new FDR? The next election will be crucial.
    https://seekingalpha.com/article/4260457-time-look-carefully-monetary-policy-3-mp3-modern-monetary-theory-mmt

  4. Trade wars are easy to win.—don trump

    Tariffs on everybody!—don trump

    Rofl!!!! America bout to get knocked the fugout!!

  5. Nice video I'm in real estate (see my videos on apartment investing) so I'm getting ready for this. Buying apartments for blue collar tenats and under value fixers. It's a good indicator to watch, but also like the talker on the right said there's real world effects that have already happened to adjust for this. Like Fed already reacting with lower rates, and there was already a big stock sell off…

    We'll see these things are hard to predict, but we should be concerned about lending and banks when the yield curve inverses… It affects loans on commercial real estate a lot like multifamily. The economy is already slowing, but for how long and to what extent no one can predict.

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