Mohit Oberoi
Recession fears have compounded amid the recent US bank failures. Bond guru Jeffrey Gundlach has said that a US recession looks imminent looking at the movement in treasury yields.
Notably, yield curve inversion is among the most credible recession indicator. In November last year, the relationship between the 3-month and the 10-year yield, which is among the most followed recession indicator, inverted.
The spreads between 10-year and 2-year treasury yields had been negative even before that. Meanwhile, after the collapse of SVB, we saw a steepening of the US yield curve which Gundlach sees as a sign of an “imminent recession.”
Here it is worth noting that the US yield curve as well as expectations from Federal Reserve’s March meeting have whipsawed over the last week.
UST yield curve now aggressively steepening after sustained inversion is highly suggestive of imminent recession.
— Jeffrey Gundlach (@TruthGundlach) March 13, 2023
Last week, US 2-year yield surpassed 5% for the first time since 2007 after Fed chair Jerome Powell’s Congressional testimony where he acknowledged that interest rates might need to rise higher than what the US central bank previously envisioned.
Powell also said that the Fed could increase its pace of rate hikes if the economic data warrants “faster tightening.”
US inflation turned out to be a lot more sticky than the Fed had thought and in January both the consumer and wholesale inflation rose on a monthly basis and the readings came in ahead of estimates.
High inflation is invariably negative for risk assets like growth stocks. However, some investment strategies can outperform during high inflation.
Gundlach Says a US Recession is Imminent
Meanwhile, Gundlach is not the only market participant who is predicting a US recession. Many economists including Steven Blitz TS Lombard’s Chief US Economist believe that the Fed cannot tame inflation without causing a recession.
On more than one occasion Fed has said that while its rate hikes might lead to a recession, it is not deliberately trying to impose one.
While recession impacts most sectors of the economy, some of the investments are largely recession-proof.
Major US banks including Bank of America, JPMorgan Chase, and Wells Fargo see a mild recession as their base case scenario for 2023.
Earlier this year, The World Bank slashed its 2023 global GDP growth forecast to a mere 1.7% which is way below its previous projection of 3% growth. It also fears a recession this year amid slowing global growth.
If the World Bank’s projections turn out to be true, it would be the third worst global growth in almost three decades. The global economy fared poorly only during the Global Financial Crisis and the 2020 COVID-19 pandemic.
Is the US Fed to Blame for the Economic Slowdown?
Tesla’s CEO Elon Musk is among those who believe that the Fed’s rate hikes are amplifying the impending recession. Cathie Wood of ARK Invest, who is among the most notable Tesla bulls has also faulted the Fed for its relentless rate hikes.
Wood believes that the US economy is headed for deflation, a view that Musk and Gundlach echoed.
While Powell has said multiple times that its rate hikes could cause a recession, he said in the same tone that it is not an economic outcome that the Fed is pushing for. Powell is still hopeful of a soft landing for the US economy, but not many share his optimism.
As Steven Blitz put it “There is no exit from this until he [Fed Chair Jerome Powell] does create a recession, ’til unemployment goes up, and that is when the Fed rates will stop being hiked.”
Meanwhile, while US stock futures were up sharply previously after the US government reassured SVB depositors, markets are down in early price action today on fears of contagion from the failure of SVB and Signature Bank and recession worries.
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This article was written for Business 2 Community by Mohit Oberoi.
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