Tags: recession | economy | investors | yield | curve

25 Percent Recession Chance Always Haunts US

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Monday, 25 March 2019 10:06 AM Current | Bio | Archive

Special counsel Robert Mueller concluded that President Trump and his campaign didn’t conspire or coordinate with Russia to interfere in the 2016 election, according to a “letter” Attorney General William Barr sent yesterday (Sunday) to Congress that summarizes the final report of Special counsel Robert Mueller’s investigation.

In his letter, Attorney General William Barr writes: “The special counsel did not establish that members of the Trump campaign conspired or coordinated with the Russian government in its election interference activities,” The Wall Street Journal reported.

For investors it’s important to keep in mind that this has limited relevance for financial markets.

The investigation mattered to financial markets only to the extent that it affected the administration’s policy making ability. With Democrats in control of the House, President Donald Trump’s policy making ability was already limited. At the margin, the failure to exonerate President Donald Trump over obstruction of justice may lead to more investigations, which may in turn tie up White House time, but this is also unlikely to impact financial markets.

Besides that, last week there was also a flurry of interest over the U.S. Treasury yield curve “inverting”, though as early as this morning the yield curve was not inverted anymore with the 3-month yielding 2.44 percent while the 10-year yielded 2.46 percent, Bloomberg reported.

Now, assertions that an inverted yield curve in the U.S. means that a recession is due at some point have been heard loud and clear.

For investors it’s worth pointing out that no other economy in the world has this relationship between the yield curve and recessions and that is because economic theory doesn’t really support the relationship.

It is also worth pointing out that in the United States there is no agreement on about how far into the future any recession is likely to occur. There is nearly always about 25 percent chance of a recession in a couple of years’ time, given how long economic cycles normally last. The inverted yield curve is not necessarily a terribly helpful indicator.

The dollar index DXY at 96.6160 is practically unchanged from Friday’s close.

In the meantime, over in the United Kingdom, the UK’s interminably tedious divorce process from the European Union gets more complicated by the day, but investors should have become used to this by now.

Parliament debates now holding “indicative” votes on what to do next, with little to no sign that the government’s withdrawal agreement will be agreed by Parliament.

If indicative votes are to be held, they are likely to be held on Wednesday, which is something for investors to look forward to, the BBC reported.

The British pound quotes around $1.3180 that is a little bit down from Friday’s close at $1.3209.

Besides that, today we got the German “Ifo” Business Climate Index that is a highly-regarded early indicator of economic developments in Germany, which rose 0.9 points from February to 99.6 in March, easily beating market expectations of 98.5. It was the first increase in German business morale in seven months, which is of course positive news. The gauge of current conditions increased to 103.8 from 103.6 in February and the business expectations sub-index rose to 95.6 from 94.

Financial markets will pay attention to this in the context about the drop in the German Purchasing Managers Manufacturing Sentiment opinion poll that was published on Friday and that came in at 44.7 in March, down from 47.6 in February, which was its lowest reading in over six-and-half years.

Phil Smith, principal economist at IHS Markit commented “The downturn in Germany’s manufacturing sector has become more entrenched, with March’s flash data showing accelerated declines in output, new orders and exports. Uncertainty towards Brexit and US-China trade relations, a slowdown in the car industry and generally softer global demand all continue to weigh heavily on the performance of the manufacturing sector, which is now registering the steepest rate of contraction since 2012.“

On Friday we got also the IHS Markit Flash Eurozone PMI about which Chris Williamson, Chief Business Economist at IHS Markit commented “The Eurozone economy ended the first quarter on a soft note, with the flash PMI running at one of the lowest levels seen since 2014. The survey indicates that GDP likely rose by a modest 0.2 percent in the first quarter. Forward-looking indicators such as business optimism and backlogs of work suggest that growth could be even weaker in the second quarter. Worryingly, with order book backlogs shrinking at the steepest rate since late-2014, more and more companies are pulling back on hiring, and likely reviewing their investment spending.”

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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HansParisis
There is nearly always about 25 percent chance of a recession in a couple of years’ time, given how long economic cycles normally last. The inverted yield curve is not necessarily a terribly helpful indicator.
recession, economy, investors, yield, curve
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2019-06-25
Monday, 25 March 2019 10:06 AM
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