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Weekly Chart Review
How to know when the recession has begun.
Every time the yield curve inverts, the calls for a recession begin. Further, every time a recession doesn’t begin shortly thereafter, the narrative shifts to “See, we didn’t have a recession…the yield curve inversion is wrong this time…”
The key thing to remember is that it’s not when the yield curve inverts that we have a recession, it’s when the yield curve un-inverts that we have a recession.
There are several ways to measure a “yield curve inversion” but one of the most popular is to look at the “2’s 10 curve” which is calculated by taking the yield on the US Treasury 10-year note and subtracting the yield on the US Treasury 2-year note. If the resulting yield is below 0.00%, the curve is inverted.
When we do that and plot it over time, we get the following chart.
In the chart above, I have marked the “un-inversion” with a vertical green line. The vertical red bars are recessionary periods. You can see that in each of the last four recessions, it wasn’t until the “2’s 10 curve” un-inverted that the recession began.
The time from un-inversion to the beginning of the recession ranged from 49 days to 210 days or an average of 131 days which equates to a little over 4 months.
Where are we today?
If we zoom in on the current “2’s 10” chart, we find that the curve inverted on July 5, 2022, and has remained inverted ever since.
From a technical standpoint, the chart has formed a “double-bottom” which calls for a target of 0.557% which would mean that the curve would be un-inverted at that point.
The difficult part is trying to determine the time frame over which this target is achieved. With that said, it is worth pointing out that from September 21st to October 6th (or 12 trading days), the curve increased by +0.50%. Another such increase would put the curve well into positive (i.e., un-inverted) territory.
Over the last week, the “2’s 10 curve” has made an about-face and has come off the pace of un-inversion that we saw in the yellow highlighted box area in the chart.
Will the move lower continue or will it resume its march higher? Either way, -0.268% has proven to be an important level twice so far so look for a break of this level to suggest that we are heading towards an un-iversion.
Once said “un-inversion” occurs, that’s when you need to have your antenna up for the beginning of the recession. With that said, remember that a recession will not be declared by the National Bureau of Economic Research (NBER) until many months/quarters later.
Instead, what you want to look for are recession-type activities which include, but are not limited to:
- Jobless claims increasing.
- The unemployment rate moving higher.
- “Something breaking” leading to a credit event of some sort.
- Equities trading lower.
- The Fed reducing short-term rates to support the economy.
It’s impossible to determine the timing and order of the events above but history would suggest that one or more of them are coming. Therefore, the prudent thing to do is to take precautionary steps in advance. This doesn’t mean that you have to do everything at once.
For instance, if I thought it was going to rain today, I’d probably take an umbrella when I left the house, but I wouldn’t walk around with the umbrella open all day. Instead, I’d probably wait until I saw some clouds rolling in and the wind picking up before I got my umbrella out but I can’t get my umbrella out if I didn’t bring it. That’s the point.
Damon Walker may be reached at 877-299-6237 or email@example.com