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Germany 'teetering on edge of recession'; US yield curve inverts - business live Markets slide as Germany faces recession, and US and UK yield curves invert – business live
(about 4 hours later)
Rupert Thompson, head of research at wealth manager Kingswood, believes the European Central Bank will be forced to act to fight a German recession. Investors have been snapping up long-term US government debt today, sending the yield (interest rate) on 30-year Treasury bills to record lows (meaning prices are at record highs).
He writes: As Treasury yields continue to move lower, the 30-Year Treasury yield declined to a record low today. #treasuryyield #recordlow #flighttosafety pic.twitter.com/eWgAuYpNI5
“German GDP fell 0.1% q/q in Q2. While this contraction followed a 0.4% gain in Q1, the underlying picture is that Germany is perilously close to falling into recession. A US recession may be approaching, but it might not actually arrive for a couple of years.
Indeed, German investor economic confidence nose-dived in August, suggesting there will be no early reprieve. German manufacturing has been hit hard by the US-China trade war and the woes of the auto sector is the main area of weakness. GDP in the Eurozone overall, by contrast, fared rather better in Q2 with a 0.2% gain. Even so, with the risks to growth skewed to the downside, the ECB still looks all but certain to cut rates next month and a re-start of its quantitative easing programme is also quite possible.” So argues Seema Shah, chief strategist at Principal Global Investors, who predicts the downturn could be delayed until 2021, if central bankers take action.
This chart shows how the difference between longer-dated and shorter-dated US and UK government bond yields have fallen steadily in recent months -- leading to today’s worrying inversion. She writes:
The BBC’s Faisal Islam fears that the bond yield gyrations show the global economy is in trouble - just as the Brexit crisis intensifies. “The US economy is clearly weakening and risks are piling up. Capex will inevitably slow further, but under the assumption that the trade war doesn’t escalate further, it will not weaken so much as to tip the US into recession. The Fed pivot in early 2019, global central bank easing, China stimulus and the reversal of its deleveraging process will support the global economy. Certainly our own recession risk model suggests that while the probability of a US recession has increased, it still isn’t our central scenario.
Gilt curve inverted Klaxon... first time since the financial crisis —- In English, UK Government can currently borrow from markets more cheaply over a decade than it can over 3 months or two years... Rare - normally signals market expectation of weak growth/ recession. “Notably the historical success of the yield curve as a recessionary signal is too strong to dismiss. However, the lead time of its signalling can be several years, so it is our best bet that while recession is unlikely in 2020, the following year may be a fairer bet as concerns about leverage in the corporate debt maker start to come to the fore. Even so, there are certainly enough risks globally to prompt investors to take reasonable defensive positioning in their portfolios right now.
Last occurred in UK in mid 2008 (pre Lehman) and then for most of 2007 (ahead of start of crisis)Also seen in US today for first time since 07...if these signals are right, a storm is brewing in global economy, just at the very time UK political crisis resumes: (via @business ) pic.twitter.com/7vkPnbMzOP Mohamed A. El-Erian, chief economic adviser at Allianz, says this morning’s weak German GDP report has helped to drive bond yields down today.
Not quite at German levels yet, which as I was explaining on Today last week means the German government is being paid by international markets to borrow money from them - even over many years. He also cites poor Chinese industrial data released overnight, showing the smallest rise in factory output since 2002 -- another sign of economic slowdown.
European stock markets are heading further south, worried by the drama in the bond market. Again this morning, lots of talk in #markets about government #bond yields as2-10 curves invert in the UK and US (chart);New record low for the US long bond;The 10-year US yield falls to 1.60% and Germany to minus 0.64%; andThe stock of negative-yielding bonds reaches $16 tr. pic.twitter.com/eRuilPtja7
Germany’s DAX is now down 1.6%, while the UK’s FTSE 100 is down 0.9%. Italy’s FTSE MIB (also hit by political instability in Rome) has lost almost 2%. These yield moves reflect in part yet another set of weak economic data out of #China and #Germany. The dynamism of #IndustrialProduction in China is the most muted for 17 years; #Retailsales there also disappointed; and The German #economy contracted in the last quarter. pic.twitter.com/abW4WO2jCP
The UK yield curve has also inverted in the last few minutes, according to Reuters. Most of the big names on the Dow Jones industrial average are also in the red, haunted by recession worries.
That’s the first time since the financial crisis that Britain’s two-year government debt has traded at a higher yield than the 10-year option. Pharmaceutical firm WalGreens Boots Alliance is the top faller, down 3.2%, followed by chemicals firm Dow Inc (-3%), financial giant Goldman Sachs (-2.8%) and entertainment group Walt Disney (-2.75%).
James Mackintosh of the Wall Street Journal suggests British policymakers shouldn’t panic too much -- it doesn’t always herald a UK recession. This is keeping the DJIA down 1.5%, or 400-ish points, at 25,881.
Yield curve has inverted in UK and US in the region markets usually watch, 10 year minus 2 year govt bond yields. Three things:1. Terrible record of false warnings in the UK: yield curve forecast recession constantly from 1997-2001, recession finally arrived in 2008. 1/3 Technology stocks are being hit hard now, sending the Nasdaq index down by 2%, or 150 points at 7,577.
2. Yield curve has been a good warning sign of recession in US, but best track record from 10 year minus 3 month. https://t.co/sYcRlcF3at2/3 Virtually every stock on the Nasdaq is in the red, with chipmakers AMD (-4.5%) and Micron (-3.3%) among the fallers.
Oh and a bonus point is that (in US) period between yield curve inversion and recession can be very long: eg ~2 years before the last US recession for 10y-3mo, hard to hold a bearish position for that long in face of rising equity market.4/3 Newsflash: Donald Trump’s trade advisor has declared that the slump in US bond yields proves that American interest rates should be cut.
The inversion of the US yield curve is a ‘massive red warning light’ for the US economy, says Neil Wilson of Markets.com. Peter Navarro told also Fox News that the “biggest problem” which America is currently fighting is the Federal Reserve’s interest rate policy.
He points out that this is often (but not always) a harbinger of recession: So much for central bank independence....
It’s the first time it’s happened since 2007. Meanwhile the 30-year has slumped to a record low. The market is saying the risks are tilted very much to the downside. We are in a new phase of the cycle for markets now. But yes, today’s selloff will pile more pressure on the Fed to cut rates at its September meeting, having already made its first cut in a decade in July.
To recap well-worn turf, this inversion been a reliable indicator of recession many times in the past, calling seven out of the last nine. There is undoubtedly a chance of this, although we must caution that so far the US data has been pretty sturdy in the face of global headwinds and the trade policies of the White House. WHITE HOUSE ADVISER NAVARRO SAYS FALLING BOND YIELDS IS ANOTHER SIGN THAT U.S. FED SHOULD CUT INTEREST RATES
This yield curve inversion is a sell signal for risk assets and should put extra pressure on equities. Futures in the US had been tracking Europe lower and are extending their declines. Yesterday’s bounce is proving short-lived. Trump has repeatedly criticised Fed chair Jerome Powell for not cutting rates faster, so he could weigh in too.
Gold pushed up higher on the news, spiking through $1506, as it cemented its recovery after yesterday’s selloff. However, the president is currently more focused on curveballs than yield curve, judging by his latest tweet....
Newsflash: The US yield curve has inverted, intensifying fears that America’s economy could be falling into recession. A fighter and champion, GREAT! https://t.co/8LoTrb6Pdc
For non-bond experts... that means that the interest rate on 10-year American government debt has now fallen below the rate on the 2-year equivalent. Right now, two-year Treasuries are trading at a yield of 1.634%, while 10-year T-Bills only offer 1.628%. Newsflash: Stocks are sliding at the start of trading in New York, as investors fear than an American recession could be looming
In normal times, longer-dated government debt should offer a better rate of return - as there’s simply more time for something to go wrong before the money is due to be repaid. In early trading....
So an inverted yield curve is a worrying sign -- it implies that investors are more pessimistic about future growth prospects. In the past, an inverted US yield curve has been followed by a recession. Dow Jones industrial average: down 425 points or 1.6% at 25,854
BREAKING:*U.S. 10-YEAR YIELD BELOW 2-YEAR RATE FOR FIRST TIME SINCE 2007The last three times this happened, U.S. recessions soon followed.https://t.co/FLWU7cF1L1 pic.twitter.com/n3cQf0yKyD S&P 500: Down 44 points or 1.5% at 2,881
Back in the markets, shares are selling off again as investors worry about the global economy. Nasdaq: Down 138 points or 1.7% at 7,878
Fears of a German recession, and news overnight that Chinese industrial production growth has hit a 17-year low, are driving the selloff. Technology stocks and banks are among the fallers, as traders shun risky assets. Bank of America has shed almost 3%, while Apple has lost 2.3%.
The burst of optimism of a breakthrough in the US-China trade talks, after America delayed some tariffs, may also be fading. The inversion of America’s government bond yield curve today has clearly worried Wall Street, given its track record of predicting recessions.
Margaret Yang of CMC Markets explains: Back in April, the Financial Times wrote a handy feature on the inverted yield curve (full marks for prescience!).
The relief-rebound on trade optimism is fading quickly given weaker fundamentals (Germany, China data), the frustration from inconsistent policy making and the fact that delay in partial tariff is not solving any problems at all. pic.twitter.com/GZFvWCJzmE It’s online here, explaining how some experts don’t think it’s terribly reliable as a recession indicator today, while others think it could cause a recession.
Here the damage: Here’s a flavour:
FTSE 100: Down 49 points or 0.7% at 7,200 The yield curve is Wall Street’s original “fear gauge”, notching up a perfect predictive record before pretenders such as the Vix index were even glimmers in the eyes of financial engineers.
German DAX: Down 125 points or 1% at 11,624 Typically, countries pay less to borrow for three months than five years, and less for five years than for a decade — after all, investors want some compensation for the gradual erosion of inflation, or the risk, albeit faint, that a government could renege on its debt.
French CAC: Down 51 points or 0.95% at 5,312 Plotted on a graph, the bond yields of various maturities form a “yield curve” that most of the time slopes gently upwards. But sometimes short-term yields rise above longer-term ones, an “inversion” of the usual shape of the curve that has been an uncannily accurate harbinger of recessions, preceding every downturn since the end of the second world war.
Andrew Kenningham from Capital Economics has warned that a no-deal Brexit would hurt German exporters, making a recession even more likely. With both the US and UK 2-10 yield curves inverting today for the first time since 2008, here is our big read on the phenomenon - and why it is so unnerving. https://t.co/qf15YES7Ub pic.twitter.com/rbg2C6CEfP
He says: It’s worth remembering that an inverted yield curve doesn’t signal an immediate US recession - the downturn could be a year away.
“The bottom line is that the German economy is teetering on the edge of recession.” That would coincide with the next presidential election -- potentially undermining Donald Trump’s re-election bid.
The UK and Germany - Europe’s largest economies - were also its worst-performing members in the second quarter of this year. Trump has regularly pointed to the stock market as evidence that he’s doing a good job (the Dow Jones soared by almost a third during his first year in office).
They, along with Sweden, were the only countries to suffer a contraction in April-June. So any downturn would alarm the White House, and perhaps intensify calls for US interest rates to be cut.
Italy performed poorly too, with no growth, while France and Belgium managed lacklustre growth of 0.2% Assuming yield curve inversion is calling a recession in 12-18 months - that would put it slap bang in time for the 2020 US election -- can see why Trump keen on rate cuts
Here are some highlights from today’s growth report from Eurostat (which includes today’s German GDP data, and last week’s UK GDP) The futures market is signalling a rough day on Wall Street, with the US benchmark stock indices called down at least 1.3%
Poland: Grew by 0.8% in Q2, quarter-on-quarter That would wipe out Tuesday’s rally (sparked by relief that America is delaying some tariffs on Chinese-made electronics goods).
Portugal: Grew by 0.5% Economics professor Paul Krugman argues that the slump in government bond yields contains an important message -- politicians can, and should, borrow more to fund investment.
Spain: Grew by 0.5% As I wrote in yesterday's newsletter (to which you should subscribe!), amateurs talk about stocks, but professionals study bond markets. As of this morning the bond market is basically begging governments to borrow: the US 10-year real rate just 0.02 percent 1/ pic.twitter.com/e44SX8Rvu7
Netherlands: Grew by 0.5% These low, low rates are telling us several things: (a) private investment demand is really weak despite tax cuts (b) recession risks are pretty high (c) infrastructure! I mean, with borrowing virtually free, why not fix all those falling-down bridges? 2/
Belgium: Grew by 0.2% But not going to happen. One of my better takes early on was that the Trump infrastructure thing was never going to happen; sure enough, "infrastructure week" became a punchline, and now isn't even that 3/ https://t.co/alnlqhyMBf
France: Grew by 0.2% Despite today’s market turmoil, office rental chain WeWork has just announced plans to float on the US stock market.
Italy: Stagnated WeWork is a workplace start-up, which rents out co-working spaces to startups, freelancers and enterprises. At one stage it even offered free beer... which might help explain why it’s not made a profit yet, losing $2bn in 2018.
Sweden: Contracted by 0.1% WeWork is hoping to raise around $3bn through an IPO. Earlier this year it was valued at an eye-watering $47bn by Softbank, its largest investor - or 26 times its earnings.
Germany: Contracted by 0.1% With more than half a million members, WeWork is clearly popular. But such companies are vulnerable to an economic downturn, which would presumably push down the rent they can charge.
The UK: Contracted by 0.2% Financial Times editor Lionel Barber thinks this could signal the top of the market....
The Eurozone: Grew by 0.2% Bond market yields invert in US and UK; loss-making WeWork files for IPO. People, this is feeling toppy
The EU: Grew by 0.2% Newsflash: Britain’s FTSE 100 index of top blue-chip companies has hit its lowest level since early June.
NEWSFLASH: Growth across the euro area halved in the last quarter, from 0.4% to 0.2% in Q1, as Germany’s contraction held the region back. The Footsie has shed 102 points to 7148 points, its lowest level since 4th June.
That’s according to data firm Eurostat, and matches its initial estimate of eurozone GDP released at the end of July.
The wider EU also only grew by 0.2%, down from 0.5% in January-March.
More to follow...
The jump in UK inflation to 2.1% last month could spur the Bank of England to raise interest rates, despite Brexit uncertainty.
My colleague Richard Partington explains:
City economists had forecast CPI to fall to 1.9% - instead, it’s now over the Bank’s target of 2%.
The unexpected rise could pile pressure on Threadneedle Street to raise interest rates, even as economic growth falters, in a potential sign the UK could begin to mirror the stagflation of the 1970s - when growth stalled yet inflation continued to rise.
The Bank has said it could be forced to raise interest rates if Britain leaves the EU without a deal, saying the pound would plunge to drive up the cost of imports.
However, most analysts believe it would need to cut rates to support jobs and growth.
Sterling has come under intense selling pressure since the elevation of Boris Johnson to No 10, however the ONS said it was still too early to identify whether the weakness in the pound had started to push up the cost of living. It said the rising price of computer games, consoles and hotel prices rising more than they did last year had pushed up the rate of CPI from 2% in June.
In an ironic twist amid the public anger over British rail fares, the ONS said that little change in the price of an international train ticket over the past year prevented UK inflation from rising by a greater extent in June.