Is The Inversion Calling For A Recession?

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The recession is coming, the recession is coming! Look at that inversion Logan, your precious U.S. economic expansion is coming to an end, and we are all doomed.

You mean the inversion I forecast at the end of 2017 for 2018, and I believe we inverted the yield curve last year, not this year?

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

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

Look at the 10-year yield we are heading toward all-time lows.

You mean my forecast of lower yields due to world trade being weaker is happening.

“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.”

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

Over the years, I have often told my facebook followers this line.

If this is the best you American bears got, you never had anything in the first place.

I knew the recession calls would grow in fever once the 2/10 inverted. The bears are hungry vampires that haven’t sucked a drop of blood for 10 years now.

However, my faithful enemy, you’re still too early.

Let’s take a look at where we are at. I know this morning the 10-year yield is at 1.46% and the 30-year yield is at all-time lows.

For those who have followed my work over the years you know since the start of 2015, all my prediction articles have had one common theme with the 10-year yield. We will be on a channel between 1.60% -3%. I don’t believe the 10-year yield could break away from 3%, so of course, I had to forecast an inversion at the end of 2017.

This channel has been broken twice. Once in 2016 due to the Brexit exit news. Also, in 2018, as oil prices rose probably too much due to the sanction trading. This, in turn, raised inflation expectation too high pushing yields above 3%. Currently, we are at 1.46%, so this would be the third break of this level since 2015.

From Doug Short:

https://www.advisorperspectives.com/dshort/updates/2019/08/27/treasury-snapshot-inverted-yield-curve

August 27th Yields

Last year I focused on that the multidecade downtrend of yields will still stay intact.

November 8th, 2018, at an economic conference talking about how the long term downtrend hasn’t been broken. The backdrop for yields to fall next year looked good due to world trade, PMI data, and falling inflation expectation.

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Today, that chart looks a lot different but seems about right to me.

August 27th Log bonds

The dreaded inversion and now we have a full day of being inverted.
AUgust 27th Inversion duration

Now that yields are low what should we look for if we really had recession data

If the 2-year yield is holding its ground and the long end of the bond market is falling because of global weakness. That is bullish in my eye. When I believed we inverted the yield curve in 2018, the 2-year yield started to go aggressively lower getting ahead of the Fed. That was what prevented a real 2/10 inversion in 2018. We cut rates before the inversion actually happened. So, we acted accordingly. However, the long end of the bond market isn’t telling me that the U.S. is going into recession, but the global weakness is real.

I already crossed off an inversion as one of my 6 recession flags last year. However, the remaining three still are not flashing recession.

1. Leading economic Indicators not flagging a recession yet. 

In fact, leading economic indicators just printed a new all-time high breaking out of 12-month funk. Be patient my bearish American friends who have been wrong for a decade. Let the recession data come to you first instead of this fruitless calls for a recession and crash.

From Doug Short
https://www.advisorperspectives.com/dshort/updates/2019/08/22/conference-board-leading-economic-index-increased-in-july

August LEI

2. Housing Starts 

Typically housing starts to fall into a recession. Now housing did pull out a mini recessionary data line late last year in the new home sales market. We are still working off the excess supply of homes this year as housing starts are negative. However, lower mortgage rates did their things, and the monthly supply is coming down enough to start the discussion of growth in 2020. Nothing great of course but no crash in starts in 2020.

From Doug Short:
https://www.advisorperspectives.com/dshort/updates/2019/08/16/secular-trends-in-residential-building-permits-and-housing-starts

August Permits + starts

From Fred: https://fred.stlouisfed.org/series/MSACSR
New home supply

3. Where is the over-investment in this cycle that would warrant a supply spike?

Then that spike in supply would create a significant negative move in unemployment claims with scale.

From Doug Short:
https://www.advisorperspectives.com/dshort/updates/2019/08/22/weekly-unemployment-claims-down-12k-beats-forecast
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Regarding job growth, I have always been lower than most in forecasting job growth. So, I am not shocked to see that the BLS recent negative revisions are more in line with my forecast. With that said, my job growth forecast this year was between 137,000 – 157,000 jobs per month to compensate for labor force growth and the weakness in world growth and PMI data.  So, still year to date, we are beating my estimates.

Inflation is low, rates are low, and the Fed is cutting now, and consumer spending is moving along.

From Doug Short:
https://www.advisorperspectives.com/dshort/updates/2019/08/15/retail-sales-up-0-7-in-july-at-3-4-yoy

August Retail Sales Charts Core

We already had a PMI recession in 2016. I am already assuming we will have a double-dip PMI recession, but we worked off the excess of the over-investment in rigs.

Housing is taking off the recessionary scare this year with the drawn down in monthly supply.

Auto sales I would keep an eye on because of its working from a high level. That is an area to stay mindful of.

Credit stress simply isn’t flagging a recession yet even with the massive talk of over-leveraged corp debt.

So, for my bearish American friends, especially those that have been wrong for a decade. Keep an eye on leading economic indicators, housing starts, auto sales, and a noticeable red flag on credit. If those factors come up, then use the R-word until then you’re just screaming in the cold dark hoping for a drop of recessionary blood. I know you’re thirsty.

Last the 10-year yield

My low-end call looks like it about to break. On August 2, I wrote this article talking about how the 10-year yield can fall below 1% listing 4 factors.

Can the 10-Year Yield Break Under 1%

https://loganmohtashami.com/2019/08/02/can-the-10-year-yield-break-under-1/

The 10-year yield was at 1.64% recently, but 2 reasons popped up that drove yields lower in the past few days.

1. U.S. PMI data needs to break under 50
2. Bad tweets push stocks lower and money into bonds

I can’t model out the President’s response to China. All I can assume is that the election is coming up next year and I am sticking with the premise.

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Brexit 2.0 is coming up in a few weeks to folks. Buckle up it’s going to be a fun last 4 months of the year!

My point of this article is to show people what to really look for when data becomes recessionary. At some point, a recession will happen, I just can’t use the R-word until I see more confirmation data. I don’t want to be like everyone else who has failed for a decade. A lot of people are sticking their heads out now hoping for a drop of recessionary blood in 2020.  I am just not there, yet.

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