Inverted yield curve hints at recession

Equities recovered from an early morning swoon which took the Nasdaq 100 down 0.6% but rebounded to unchanged by lunchtime. Concerns of hawkishness from Fed Chair Jerome Powell's address to Congress tomorrow are weighing on equities as market expectations grow of another rate hike in July. Fixed interest yields fell today, notably short-dated 2 year notes, and yield curve inversion came close to touching one per cent – typically a warning that recession could follow soon.

Bottom line – risk-hold.

TODAY’S MAJOR NEWS

Inverted yield curve hints at recession

Shorter-dated bonds of 2 year duration are now yielding 0.93% more than 10 year bonds. As the chart below suggests this has often been a harbinger of recession on several occasions since the 1980s. Indeed, the degree of ‘inversion’ looks remarkably like that which developed in 1979. Judged in this context, the Fed’s interest rate pause has a different complexion, and could be seen as sensible caution. As my colleague Arlan Suderman has often noted, the Fed doesn’t want to ease interest rates too soon before inflation is controlled, but the result could be a recession which stocks are not currently accounting for.

US Yield Curve versus Economic Recession

Source: Federal Reserve Bank of St. Louis, FRED

Strong housing data suggests rate hikes having modest effect

Today’s strong housing starts data suggests that construction is in a healthy state despite recent interest rate hikes. Existing-home sales for May due Thursday, and new-home purchases next week, could confirm this rising optimism. This isn’t what the Fed wants to see as it tries to cool economic activity.

China cuts rates

• China’s central bank cut their own benchmark interest rates this morning for the first time in ten months, as the country’s post-pandemic recovery shows signs of losing steam
• Traders were disappointed by the lower than expected 10 basis point cuts to their one and five-year loan prime rates
• Authorities are concerned about a short-term property market recovery creating new bubble risks, offsetting longer-term reforms
• There was more negative news as China's CNPC cut their forecast for 2023 Chinese oil demand by roughly 1% compared to March's estimate

Major jump in housing starts

• US Housing Starts were 1.631 million in May, up 20% month-on-month, well ahead of the expected 1.40 million,the number for April – this was the biggest jump since 2016
• Building Permits were 1.491 million, up 5% month-on-month, also beating the 1.425 million estimate

TODAY’S MAJOR MARKETS

Equity markets

• The broadly-based Russell 2000, S&P 500 and Nasdaq 100 indexes were off 0.5%, 0.3% and 0.1% respectively, by midday after rebounding from an early morning sell-off
• Global markets were mixed, with FTSE 100 and DAX indexes were off 0.3% and 1.3%, respectively, and the Nikkei 225 unchanged
• The VIX, Wall Street’s fear index, was unchanged at 14.2

Currencies, Bonds and Crypto

• The dollar index against a basket of currencies was up 0.3% at 102.2, with the
• Sterling/dollar was 0.3% lower and Euro/dollar was unchanged
• Bond yields continued to fall, with yields on 2- and 10-year Treasuries lower at 4.67% and 3.71%
• Bitcoin continued to rally, up 3.1% to $27,429, marking a strong technical rebound

Commodities

• Gold prices fell 1.2% to $1,948 per ounce
• Crude oil prices fell 2.1% to $70.25 per barrel, continuing its recent rally
• Grain and oilseed markets were mixed

Guest analysis by Matt Zeller and Mike Castle.

Market outlook by Paul Walton, Financial Writer: Paul.Walton@StoneX.com