The difference between the two-and ten-year Treasury yield is the narrowest since 2007, a signal that “the market thinks the Federal Reserve’s interest-rate increases, which are driving short-term yields higher, will not only slow inflation, but could also tip the economy into a recession.” This according to a recent Bloomberg article.
The article outlines several reasons “to be worried about the economy:”
- Trade wars: Tariffs, the article says, “will lead to some self-imposed inflation, a more aggressive Fed and job losses, which seems like a reasonable set of recessionary pre-conditions.”
- High equity valuations: “To the extent the stock market is a proxy of economic sentiment, any shift in allocations in favor of, say, bonds will take its toll.”
- Politics in the U.S. and abroad: “Nationalism, changing political agendas and disruptions to norms heighten uncertainty, which inhibits risk-taking.”
- The Fed, the article says, is resolved on its rate hike schedule, “which has bullish implications for the dollar and bearish ones for emerging markets, as we’re seeing.”
- Hawkish central banks: The Fed “isn’t the only central bank pulling back the punch bowl,” the article argues, suggesting that we should expect the unwinding of easy money policies to have a negative impact on risk assets.
- Corporate debt is “the highest ever, and yield spreads are starting to widen in a sign of investor pullback.”
- Tax stimulus: “If we’re at the best point of the cycle for those corporate tax cuts to be working, why isn’t the stock market doing better even though second-quarter GDP is tracking at about a 4 percent rate?”
“The longer this recovery goes on and the longer equities trade sideways,” the article concludes, “the more anxious businesses will get about expanding and the itchier investors will get about taking profits.”