Macro | Recession Signals? | Aug 19th-25th

Yield Inversion - Early Recession signal

Yield curves, interest, bonds, and the ever-going fight between the FED and President Trump have all been major focal points in 2019. Even though it might be sexier discussing high yield equities, it is important to talk about what happened last week. On August 14th, the 10-year Treasury bond briefly dropped below the 2-year treasury bond. This phenomenon is known as a yield curve inversion (See picture on the right). In normal market conditions, investors see higher yields on longer-dated bonds (10-year treasury bond) than they would on shorter-term bonds (2-year treasury bond). The yield curve inversion is a signal (one of many) that expresses an increase in economic uncertainty. Importantly, the S&P 500 rises for an average of (19-22 depending on the source) months before peaking after a yield curve inversion. However, interest rates are still historically very low, with a few European countries have below zero rates. We are moving into uncharted territory.

Related articles: CNBC, Yahoo Finance, Inverstors

Trade war - What's new?

The economic war between the United States and China has been a reality for over a year. On the 6th of July 2018, US Customs began collecting a 25 % tariff on 818 imported Chinese products valued at US 34$ billion. This was the first real sight into what is now a full-blown trade war.

The trade war has escalated this week with China announcing the new US 75$ billion tariff on US goods, excepted to affect the automobile and agriculture industries. Later this week, President Trump tweeted that the US would increase tariffs scheduled to begin on September 1st from 5 to 10 percent and tariffs scheduled to begin on October 1st from 25 to 30 percent.

Markets reacted poorly, with the S&P 500 down 2.59 % on Friday. Since the beginning of the trade war, the markets have been very volatile. Even though the economy in the US is doing fine, the S&P 500 is only up 3.35 % since the trade war started (see picture to the right).

Total US tariffs applied exclusively to Chinese goods: US$250 billion

Total Chinese tariffs applied exclusively to US goods: US$185 billion

Related articles: China Briefing, Bloomberg