On Wednesday, the benchmark 10-year Treasury bond yield broke below the 1.632 percent yield of the 2-year bond. The drop is the first time this has happened since 207 – a staggering 12 years. And the dip has had a knock-on effect on the Dow Jones, which is expected to tumble in the wake of the warning. At the same time, futures for the S&P 500 shed 43.5 points, or 1.5 percent, while Nasdaq-100 futures lost 133.75 points, or 1.7 percent.
The drops today look set to reverse gains made on Tuesday, when the Dow rose some 32 points – the biggest one-day gain in two months.
So what is happening with the Dow Jones?
The declines are led by bank stocks in the premarket, as the environment makes it difficult for the group to make any profit lending money.
Also dropping were Bank of America and Citigroup, both by three percent, and J.P Morgan dropped 2.8 percent.
Bank of America technical strategist Stephen Suttmeier wrote: “The US equity market is on borrowed time after the yield curve inverts.”
An inverted yield curve is seen as an indicator of recession, as it implies investors believe the economy is soon to slow significantly or contract.
This action in the bond market followed data which demonstrated Chinese industrial production growth in the world’s second-largest economy had slowed to 4.8 percent year-over-year – the lowest level since 2002.
Retail sales growth meanwhile came in at 7.6 percent, which was down from 9.8 percent the month before and significantly below the 8.6 percent consensus, according to FactSet.
Since 1978 there have been five inversions of the 2-year and 10-year yields.
All five of these were precursors to a recession, but data from Credit Suisse shows there is a significant lag before this happens.
On average, a recession did not occur until 22 months after the inversion, Credit Suisse shows.
And the S&P 500 actually experienced average returns of 15 percent 18 months following an inversion before it finally turned.
Tom Essaye, founder of The Sevens Report, said on Wednesday: “Historically speaking the inversion of that benchmark yield curve measure means that we now must expect a recession anywhere from six-to-18 months from today which will drastically, and negatively, shift our medium-to-longer term outlook on the broader markets.”
Investors are wary as today it was announced the German economy shrank for the second-straight quarter by 0.1 percent, and the US-China trade war is still a threat overhanging markets.
Official data published Wednesday showed growth of China’s industrial output had slowed to 4.8 percent in July from last year.
The data came following a move from the US to delay tariffs on some Chinese imports.
The United States Trade Representative announced on Tuesday certain products including clothing and mobile phones were being removed from the tariff list.
This was based on “health, safety, national security and other factors” and they will not face additional tariffs of 10 percent.
Other tariffs will be delayed to December 15 from September 1 for certain products.
Published at Wed, 14 Aug 2019 12:18:00 +0000