23 Tuesday Feb 2016
Posted | February 23, 2016 7:31:20 | Economics
Curve Watchers Anonymous has its eyes on the yield curve as always. A pair of charts, five-year duration and lower vs. one-year and higher looks increasingly recessionary.
Yield Curve 1-Year to 30-Years
Yield Curve 3-Months to 5-Years
According to “leading economic indicator theory” this action is positive. I think leading economic indicator theory is nonsense.
Mike “Mish” Shedlock
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I think it is difficult to use yield curves in this environment of ZIRP/near-ZIRP. Economic theory at these interest rates has never been tested because it has never occurred. CFNAI-MA3 doesn’t look recessionary yet but it is bouncing on the negative side:
http://www.investing.com/analysis/chicago-fed:-economic-growth-picked-up-in-january-200119143
It feels more like a slowdown we saw in the 2012 election cycle which would indicates a holding pattern by businesses and consumers. Massive growth is difficult anywhere in the world without inflation. In the post-industrial information ZIRP era, it feels like the economy is a cat chasing its tail.
A few things.
Re CFNAI the Chicago Fed Res revises/updates historical numbers with every release. The single month (CFNAI) for October originally released as -.04 … now -.18. November single month originally released as -.30 … now -.39. December single month originally released as -.22 … now -.34.
No doubt bump in January due to increase in auto manufacturing as revealed in Industrial Production report. Sustainable?
Re 2012. The business cycle was not complete then. In 2012 the Total Business Inventories / Sales was in normal range of 1.25 to 1.30. Now (December latest) ratio stands at (recessionary) 1.39 (with year over year sales declining while year over year inventories growing. Not a good cocktail). End of 2012 and early 2013 saw a bump due to tax increases that went into effect January 1st, 2013. Kind of counter intuitive, but income pulled forward into 2012 (some of it pulled YEARS in the case of special dividends and capital gains). I looked pretty close at the time and the best I could come up with was a range of $250 billion to $400 billion pulled forward. No doubt much reinvested, but how much spent providing boost to economy?
The Business Cycle OVER.
Recession at hand.
Agree with Sekar in that this is not a normal economic environment. Central bank manipulation of interest rates and debt valuation throughout the world render fundamental analysis worth much less than in the past. The yield curve is more of a curiosity now, as opposed to an economic indicator.
Falling stock markets will motivate a flight to safety, causing long term debt rates to fall significantly. It’s already happened over the past few weeks and will continue. The stock market rise of recent years was more a function of central bank balance sheet expansion, rather than economic expansion. A stock market decline is not indicative of a recession this time. It’s a reversion to mean.
Japan, out of stupidity, and the ECB, out of necessity, will keep interest rates lower than they otherwise would be, rendering yield curve analysis useless for now and the intermediate future. By necessity, with respect to the ECB, yields will remain low and the ECB will continue to purchase sovereign debt in order to keep them low, because the Eurozone will collapse economically as soon as it stops subsidizing euro-debt. Japan lives in another universe and has become substantially irrelevant in many respects.
” A stock market decline is not indicative of a recession this time.”
We will all see what is revealed, in good time, but the stock market decline in October-December 2007 was not indicative of a recession either, but one began in December that year. The worst recession since the Great Depression.
To me it feels as if the market is expecting the FED to run in on a white horse at any moment, so there is no panic to get out of Dodge.
What the FED will do and when is an open question. Committed to a rate hike regime, the FED may wait longer than anyone expects, before they will reverse course, due to their credibility issue.
While there has been no indication of negative GDP yet, it feels like a recession is coming on, looking at all the various charts. The business cycle runs some 7 years or so and we are sitting at over 8 years since the last recession began.
Japan 10yr note yield looks like it hit an all time low of NEGATIVE 6 bps today.
Yen strengthening versus $US.
Interesting times.