2017 Yield Inversion Call Looks Great Now

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At the end of 2017, my forecast was for yields to invert in 2018. Typically that is a recessionary forecast. I believe I was the only one on record to have that forecast that in 2017.

“I am also looking for yields to invert in 2018.”

https://loganmohtashami.com/2017/12/31/2018-economic-housing-predictions/

At the end of 2018, my forecast was for the 10-year yield to go below 2% if world trade got weaker. I believe I was the only one on record to have that forecast in 2018

“For 2019, I am sticking to my call that the 10-year yield will channel between 1.60% to 3%.  If world trade gets weaker, we could see the 10-year yield with a 1% handle again.”

We recently had a 1.97% on the 10-year yield today currently at 2.02%

My 2019 economic forecast was to focus a lot on our domestic PMI data which had room to fall.

“I expect PMI data to fall year over year, which could impact domestic investment slightly, but the economic cycle still has legs to move forward. Keep an eye on the PMI data in 2019.  Since America PMI data was good 2018, it has the most room to fall with falling oil prices now.  Keep in mind that we already had a manufacturing recession when oil prices crashed a few years ago. We no longer have that massive over-investment in rigs ready to collapse like we saw before.  We haven’t even recovered all the extraction jobs at the peak of the shale boom.”

https://loganmohtashami.com/2018/12/29/2019-economic-housing-predictions/

We have soft PMI data out today and PMI data, in general, is weaker this year.

From Doug Short:
https://www.advisorperspectives.com/dshort

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June ISM PMI

Also, if you incorporate my Fed model that I wrote in 2018 the Fed Funds future is forecasting rate cuts getting down to what I would deem to be a proper neutral Federal Funds rate.

https://loganmohtashami.com/2019/06/19/the-fed-needs-more-inflation-2019-edition/

However, no R word uttered from my mouth (Recession). I fully believed we inverted the yield curve last year, and I accept the recessionary implication that the data line would bring. However, the 2-year yield got way ahead of the Fed last year, creating a buffer to prevent an actual 2/10 inverted yield curve. Before I utter the R-word, I need to see the final 3 red flags come up.

4.     Housing starts to fall.

Even though housing starts are still pushing negative year over year prints, the monthly supply drawdown we saw this year gives it a pass for 2019, and as long as the monthly supply stays below 6.5 months, we get a pass for next year.

From Fred:
https://fred.stlouisfed.org/series/MSACSR
May 2019 Supply

5.  We find that over-investment in the economic cycle that will create a big supply spike due to weaker demand, which will drag the entire economy lower. 

The PMI recession of 2016 took off some over-investment in this cycle with oil rigs. Currently, I am keeping an eye out on the auto sector to see when real supply shock weakness shows itself, and so far, I got nothing flashing the R word.

6.     Leading economic indicators fall for  4 to 6 months straight. This hasn’t happened yet.

LEI, while not growing at a fast rate isn’t trending negative.

From Doug Short:
https://www.advisorperspectives.com/dshort/updates/2019/06/20/conference-board-leading-economic-index-unchanged-in-may

June LEI

My inversion call in 2017 for 2018 and 1 handle 10-year yield call if world trade got weaker in 2018 for 2019 was based on my core belief for years now that the 10-year yield can’t break away from 3%. This is something that I tried to convey at an economic conference last November 8th when the 10-year yield was at 3.24%, but we had no clear breakout from the long term downtrend.

2018 Women’s Council of Realtors South Orange County Economic Throwdown!

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Don’t make the mistake many people did in this record expansion by saying falling yields are a recessionary data line. We have seen the 10-year yield twice get below 1.50% in 2012 and 2016, and it was recessionary. We have other economic data to look at to flag a recession, but still today, I believe we inverted the yield curve last year.

Logan Mohtashami is a financial writer and blogger covering the U.S. economy with a specialization in the housing market. Logan Mohtashami is a senior loan officer at AMC Lending Group,  which has been providing mortgage services for California residents since 1987. Logan also tracks all economic data  daily on his own facebook page https://www.facebook.com/Logan.Mohtashami