Topic 1: US: RECESSION WARNINGS RISE AS YIELD CURVE INVERTS

Recession warnings are clearly on the rise. The 2-year and 10-year Treasury yield inverted for the first time since 2019, giving us early signs of a possible recession on the horizon (since 1978, yield curve inversions have consistently provided recession warnings). The bond market is discounting weaker economic growth, earnings risk, elevated valuations, and a reversal of monetary support

The US Fed is tasked with controlling the inflation by slowing the economy but not so much that it triggers the risk of recession. Since March 2022, the Fed has already raised interest rates twice and is expected to aggressively raise rates through the year.

Higher borrowing costs reduce lending and spending in the economy, cooling the pressure on prices. However, this results in a slowing of the economy which could trigger a recession. While the Fed is hoping to achieve a “soft landing” by controlling the inflation without causing unemployment to rise or trigger a recession, market participants believe otherwise.

The US economy is facing inflationary pressures from higher energy prices due to the Russia-Ukraine war and supply-chain disruptions as Covid-19 forces new lockdowns in China. These factors threaten to worsen inflation even further.

Another challenge that the Fed faces today is the low unemployment rate. A tight labour market, where the demand for workers is far outpacing the supply, implies that companies would raise wages to attract new workers. In a sense, wages are the ultimate measure of core inflation – more than twothirds of business costs go back to labour – so rising wages put significant upward pressure on inflation.

In our assessment, the inflation problem facing the Fed today is substantial and unlikely to be resolved without a significant economic slowdown. Overall, the combination of an overheating economy, surging wages, and recent supply shocks means that the fear of recession is real



Top | Back
The information contained herein (the “Information”) may not be reproduced or disseminated in whole or in part without prior written permission from the Company. The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The document has been prepared based on publicly available information, internally developed data and other sources believed to be reliable. The directors, employees, affiliates or representatives (“Entities & their affiliates”) do not assume any responsibility for, or warrant the accuracy, completeness, adequacy, reliability and is not responsible for any errors or omissions or for the results obtained from the use of such information. Readers are advised to rely on their own analysis, interpretations & investigations. Certain statements made in this presentation may not be based on historical information or facts and may be forward looking statements including those relating to general business plans and strategy, future financial condition and growth prospects, and future developments in industries and competitive and regulatory environments. Although the Company believes that the expectations reflected in such forward looking statements are reasonable, they do involve several assumptions, risks, and uncertainties. Readers are also advised to seek independent professional advice to arrive at an informed investment decision. Entities & their affiliates including persons involved in the preparation or issuance of this document shall not be liable in any way for direct, indirect, special, incidental, consequential, punitive or exemplary damages, including on account of the lost profits arising from the information contained in this material. Readers alone shall be fully responsible for any decision taken based on this document.
Copyright © 2022 Fintso