Shownotes
Warning Sign #1 - Inverted yield curve
- It’s not the first time the Fed has fought inflation
- Fed has been fighting inflation with its main tool
- Steep rate hikes have historically preceded recessions
- Fed’s tool to fight inflation is raising the federal funds rate
- This is the fastest and most aggressive rate-hike cycle by the Fed since the 1980s
- After the 0.25%-hike in Feb 2023, the current rate-hike cycle became the most aggressive since the 1980s
- The Fed has hiked rates by 5.25% in the current cycle
- This has resulted in short-term rates becoming higher than long-term (yield-cure inversion)
- Yield-curve inversion signals 4Q23 US recession
- All recessions in the US since 1968 were preceded by an inverted yield curve
- As it turns, recession typically follows
- Average time from inversion, until the recession started, was about 1 year (so 4Q23)
Warning Sign #2 - Peak employment
- US is now at peak employment
- Peak employment precedes recession
- Unemployment now at 3.8% (same as April 2000)
- Puts upward pressure on wages, which is inflationary
- On the flip side, a strong labor market can keep the recession at bay
Warning Sign #3 - Slowdown in bank lending
- Business lending has slowed; real estate and consumer loans flat
- Warns about a slowdown in business activity
Warning Sign #4 - Leading indicators falling & bankruptcies rising
- Composite leading indicators falling but seen a slight rebound recently
- The indicator looks at factors aimed at providing early signals of turns in the business cycle
- While the indicator has given false signals before, recessions have typically followed large falls
- 72 US bankruptcy filings in 1H23, more than the previous two years
- Private and public companies with over US$100m in assets at the time of bankruptcy filing
- “Filings in the first seven months of 2023 surpassed total filings for the previous year”
- S&P Global Market Intelligence recorded 64 corporate bankruptcy filings in July, the largest monthly total since March and more filings than in any single month in 2021 or 2022
Warning Sign #5 - Weakening consumer
- Retail sales have been slowing, which typically precedes a recession
- Consumer sentiment has fallen since 2020
- Credit card debt at US$1trn and growing while past due bills are rising
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