Carnage on Wall Street as yield curves invert
|As recession warnings flashed from the bond market, Wall Street plummeted lower overnight. The Dow closed down 800 points whilst the Nasdaq and the S&P tumbled 3% and 2.9% respectively. Asian markets followed US equity indices lower.
An inversion of the 2-year treasury yield with the 10 year yield for the first time since 2007 injected fear across the financial markets. The yield curve inversion is considered to be a warning shot for a recession. Investors are nervous because the inversion of these yield curves has accurately predicted each of the previous 7 recessions, including the Great Recession. Investors responded by dumping riskier assets, such as equities, instead moving their money into safer havens such as the Japanese yen and gold. Oil also fell sharply. European and US futures are pointing to a mixed start on the opening bell on Thursday.
It is important to note that whilst an inverted yield preceded every recession, not every yield curve inversion leads to a recession. That said given the US – Sino trade dispute, Brexit, political unrest in Hong Kong and political instability in Italy, investors have plenty to worry about.
If a recession is coming it could still be a good 18 months away This makes President Trump’s tweet attacking the Federal Reserve as stocks tanked more understandable. Of course, Trump wants lower rates, a recession around the time of the US Presidential elections is a sure way to lose the race.
Will US retail sales restore confidence?
The dollar closed the previous session higher thanks to its safe haven appeal, despite Trump’s attack on the Fed. Attention will fall to US retail sales this afternoon for further clues over the health of the US economy. Expectations are for a steady 0.3% growth in retail sales month on month in July. A stronger reading could help repair frayed nerves boosting the dollar and the US stock indices. However given the heightened fears of recession, a weak reading could spark another sell off.
Pound traders to shrug off retail sales as well?
Pound traders will also be looking towards UK retail sales data. Expectations are for a -0.2% decline month on month in July, down from 0.9% previously. The data comes after figures earlier in the week showed that UK wages grew at the fastest pace in 11 year and after inflation unexpectedly pushed back above the BoE’s 2% target. Yet despite these encouraging readings the pound continues to hover around $1.2050. Clearly Brexit is all that really matters to pound traders right now. With this in mind a stronger than forecast reading could see a limited reaction.
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