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Is it time to talk recession?
The US yield curve may have turned negative in the US, sending the US and markets around the world sharply lower, but analysts said it’s too early to cry recession just yet.
The much-vaunted US yield curve is held up as a key indicator for markets everywhere.
Under normal conditions, twoyear bond yields should be lower than longer-term ones, reflecting reward for tying up money for longer periods.
The US curve has steadily been flattening over the last few months. In July, the differential was a positive 28 basis points.
The price action in the bond market, along with news that the German economy shrank in the second quarter, data showing China’s industrial production grew at the weakest rate in 17 years last month, and ongoing negative fallout from US-China trade friction, drove the Dow Jones Index down by 3 per cent to its biggest fall so far this year.
That was enough to send most other markets — including New Zealand’s — lower but not to the same extent.
Westpac senior markets strategist Imre Speizer said the US yield curve, by itself, should not be seen as indicator of an impending recession.
He said the low 10-year yield
People are worried because many assets now have gone up almost in a straight line since the Global Financial Crisis — so valuations are quite stretched. Imre Speizer, Westpac
reflected expectations that there was no prospect of rising inflation for many years to come.
“It does not necessarily say that a recession is imminent, although people are playing that up,” he told the Herald.
Speizer said several other boxes needed to be ticked before a US recession could reliably be predicted.
“Yes, the yield curve is flat enough to be ticked, but most other indicators have not yet been ticked, so overall your dashboard would say that there is very little chance of recession,” Speizer said.
“People are worried because many assets now have gone up almost in a straight line since the Global Financial Crisis — so valuations are quite stretched.
“That’s why there is undue attention being place on this yield curve shape as a possible predictor of recession.
“The yield curve shape is but one of many indicators that need to to be satisfied to signal a possible recession. On its own, we do not believe that it is a very good indicator,” Speizer said.
ASB chief economist Nick Tuffley said the curve indicated that the US economy was slowing.
“We think that it’s a case of the US economy slowing somewhat rather than the US economy heading for a recession,” Tuffley said, adding US unemployment is now at its lowest point since the 1960s.
“The economy is hardly in terrible shape at the moment,” Tuffley said.
Across the Tasman, the Reserve Bank of Australia’s deputy governor Guy Debelle said he wasn’t sure how much of a signal the US curve was offering.
“At the moment the US economy is actually growing above trend so they’ve got a fair way to slow from here,” Bloomberg reported Debelle as saying.
Harbour Asset Management portfolio manager Shane Solly said Wall Street’s sharp decline would take some confidence out of the local market.
He said the New Zealand reporting season to date had been progressing well and the numbers to date been “okay”.
“But it is volatile and this is telling us that there is a degree of uncertainty around how trade negotiations are going to unwind,” he said.
Solly said it now appeared that the reasons why central banks here and around the world had opted to cut official rates — such as lower world economic growth — were starting to surface.
However, the New Zealand sharemarket, with its high proportion of defensive-style, dividend-yield stocks, would offer investors a degree of protection from big swings on overseas markets, he said.