Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
Trading Natural Gas As The Season Changes - 16th Sep 19
Cameco Crash, Uranium Sector Won’t Catch a break - 16th Sep 19
These Indicators Point to an Early 2020 Economic Downturn - 16th Sep 19
Gold When Global Insanity Prevails - 16th Sep 19
Stock Market Looking Toppy - 16th Sep 19
Is the Stocks Bull Market Nearing an End? - 16th Sep 19
US Stock Market Indexes Continue to Rally Within A Defined Range - 16th Sep 19
What If Gold Is NOT In A New Bull Market? - 16th Sep 19
A History Lesson For Pundits Who Don’t Believe Stocks Are Overvalued - 16th Sep 19
The Disconnect Between Millennials and Real Estate - 16th Sep 19
Tech Giants Will Crash in the Next Stock Market Downturn - 15th Sep 19
Will Draghi’s Swan Song Revive the Eurozone? And Gold? - 15th Sep 19
The Race to Depreciate Fiat Currencies Is Accelerating - 15th Sep 19
Can Crypto casino beat Hybrid casino - 15th Sep 19
British Pound GBP vs Brexit Chaos Timeline - 14th Sep 19
Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - 14th Sep 19
War Gaming the US-China Trade War - 14th Sep 19
Buying a Budgie, Parakeet for the First Time from a Pet Shop - Jollyes UK - 14th Sep 19
Crude Oil Price Setting Up For A Downside Price Rotation - 13th Sep 19
A “Looming” Recession Is a Gold Golden Opportunity - 13th Sep 19
Is 2019 Similar to 2007? What Does It Mean For Gold? - 13th Sep 19
How Did the Philippines Establish Itself as a World Leader in Call Centre Outsourcing? - 13th Sep 19
UK General Election Forecast 2019 - Betting Market Odds - 13th Sep 19
Energy Sector Reaches Key Low Point – Start Looking For The Next Move - 13th Sep 19
Weakening Shale Productivity "VERY Bullish" For Oil Prices - 13th Sep 19
Stock Market Dow to 38,000 by 2022 - 13th Sep 19 - readtheticker
Gold under NIRP? | Negative Interest Rates vs Bullion - 12th Sep 19
Land Rover Discovery Sport Brake Pads and Discs's Replace, Dealer Check and Cost - 12th Sep 19
Stock Market Crash Black Swan Event Set Up Sept 12th? - 12th Sep 19
Increased Pension Liabilities During the Coming Stock Market Crash - 12th Sep 19
Gold at Support: the Upcoming Move - 12th Sep 19
Precious Metals, US Dollar, Stocks – How It All Relates – Part II - 12th Sep 19
Boris Johnson's "Do or Die, Dead in a Ditch" Brexit Strategy - 11th Sep 19
Precious Metals, US Dollar: How It All Relates – Part I - 11th Sep 19
Bank of England’s Carney Delivers Dollar Shocker at Jackson Hole meeting - 11th Sep 19
Gold and Silver Wounded Animals, Indeed - 11th Sep 19
Boris Johnson a Crippled Prime Minister - 11th Sep 19
Gold Significant Correction Has Started - 11th Sep 19
Reasons To Follow Experienced Traders In Automated Trading - 11th Sep 19
Silver's Sharp Reaction Back - 11th Sep 19
2020 Will Be the Most Volatile Market Year in History - 11th Sep 19
Westminister BrExit Extreme Chaos Puts Britain into a Pre-Civil War State - 10th Sep 19
Gold to Correct as Stocks Rally - 10th Sep 19
Market Decline Will Lead To Pension Collapse, USD Devaluation, And NWO - 10th Sep 19
Stock Market Sector Rotation Giving Mixed Signals About The Future - 10th Sep 19
The Online Gaming Industry is Going Up - 10th Sep 19
The Unknown Tech Stock Transforming The Internet - 10th Sep 19
More Wall Street Propaganda - 10th Sep 19
Stock Market Price Structure Still Suggests We Are Within Volatile Rotation - 9th Sep 19
Stock Market Still Treading Water - 9th Sep 19
Buying Pullbacks in Silver & Gold - 9th Sep 19
Government Spending - The High Price of a "Free Lunch" - 9th Sep 19
Don't Worry About a Recession - 9th Sep 19
Large Drop in Stocks, Big Rally in Gold and Silver - 9th Sep 19

Market Oracle FREE Newsletter

The No1 Tech Stock for 2019

Waiting for an Inverted Yield Curve to Signal an Imminent Recession?

Economics / US Economy Aug 10, 2011 - 01:42 AM GMT

By: Paul_L_Kasriel

Economics

Best Financial Markets Analysis ArticleDon’t hold your breath. As Chart 1 shows, moving from a positive spread between the yield on the Treasury 10-year security and the fed funds rate has more often than not in the past 55 years signaled the commencement of a recession on the near-term horizon. There have been a few miscues – instances when a recession occurred without the spread turning negative prior to the onset of the recession and some instances when the spread turned negative but a recession did not ensue. So, like so many other leading indicators, the negative-spread recession indicator is not foolproof.


If a recession were to commence in the next six months or so, is it probable that the “spread” would alert us to this outcome by moving into negative territory? Not bloody likely! Why not? Because the fed funds rate is hovering just above the zero level and is expected to hover there in the foreseeable future. In order for the spread to become negative, the yield on the 10-year Treasury security would have to approach zero. Although there always is a first time, not even during the early 1930s did Treasury bond yields move to zero or below, as shown in Chart 2. For the sake of argument, let’s assume that a recession does begin in the next six months. If you were to wait for the spread to move negative as a signal of an imminent recession, you will be like a batter watching a called “strike three.”

This is not to say that the spread is devoid of use with regard to making some educated guesses about the course of economic activity in the next six months. When the spread has been “operative” as a recession signal, before going negative, of course, the spread had to narrow. So, the “trend might be your friend” with regard to the behavior of the spread. A narrowing trend in the spread generally indicates weaker economic growth ahead. And that has just how the spread has been behaving in recent months (see Chart 3). Since April 11, the trend in the spread has been one of narrowing – narrowing by 121 basis points by August 8. Bear in mind, this narrowing in the spread has occurred at a time when we might have expected the spread to widen inasmuch as S&P issued its negative ratings watch on U.S. sovereign debt on April 18 and Fed officials had been signaling their intent to cease purchasing Treasury coupon securities by June 30. The fact that the spread narrowed this much in such short time under these conditions is a necessary ingredient for the formation of a recession.

Keep a “weather eye” on the behavior of the sum of Federal Reserve and commercial bank credit (see Chart 4). If this sum heads south, then, along with the narrowing spread, conditions would be conducive for the formation of a recession.

With All Due Respect, Congressman Paul …

Whenever a statement is prefaced by “with all due respect,” you know some disrespectful comment is on the way. So, here goes. On Monday, as stock markets around the world swooned after, but not because of, Friday’s downgrade of U.S. sovereign debt by S&P, Congressman Paul said something along the lines of the markets were sending a signal that the U.S. Treasury would not explicitly default on its debt, but rather would implicitly default on its debt via inflation. Presumably, Congressman Paul arrived at this conclusion by observing that the U.S. gold futures nearby contract hit a record high on Monday (see Chart 5). But also on Monday, participants in the Treasury bond market lowered their expectations of the average annual percent change in the CPI, the CPI including food and energy, by 6 basis points to 2.20%. As can be seen in Chart 5, Treasury bond participants have been lowering their 10-year expectations of the rate of CPI increases from mid April, which, coincidentally, is when S&P put U.S. sovereign debt on a negative watch for a downgrade. So there you have it. One direct measure of investors’ inflation expectations is signaling an expected lower rate of price increases for goods and services – the breakeven rate of increase in the CPI between the yield on the nominal Treasury 10-year security and the yield on the inflation-protected Treasury 10-year security. Interpreting the behavior of the price of gold is akin to a Rorschach test. Different people can have different interpretations of the same behavior.

Paul Kasriel is the recipient of the 2006 Lawrence R. Klein Award for Blue Chip Forecasting Accuracy

by Paul Kasriel
The Northern Trust Company
Economic Research Department - Daily Global Commentary

Copyright © 2011 Paul Kasriel
Paul joined the economic research unit of The Northern Trust Company in 1986 as Vice President and Economist, being named Senior Vice President and Director of Economic Research in 2000. His economic and interest rate forecasts are used both internally and by clients. The accuracy of the Economic Research Department's forecasts has consistently been highly-ranked in the Blue Chip survey of about 50 forecasters over the years. To that point, Paul received the prestigious 2006 Lawrence R. Klein Award for having the most accurate economic forecast among the Blue Chip survey participants for the years 2002 through 2005.

The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.

Paul L. Kasriel Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules