The extremely sharp Tim Duy provides us with not a recession signal but rather with a signal that current Fed policy is going to provide us with a recession signal: Tim Duy: Fed Pushing Ahead Toward Inversion: "I fully expect the Fed will continue hiking rates if the yield curve inverts unless there is a clear financial meltdown at that time...
...Powell & Co. will find it impossible to resist the siren song of the data near the peak of a business cycle. When the hikes continue after the yield curve inverts is when I go on recession watch. But again, timing is everything. Because the inverted yield curve is a long leading indicator, equities easily might continue to rise in the period after the inversion but before the recession. Hence, the inversion would likely be a premature “sell equities” signal.
Bottom Line: The U.S. economy retains substantial momentum, easily sufficient for Powell & Co. to stick with their gradual plan of gradual rate hikes. That plan has to date flattened the yield curve just like in every tightening cycle as long rates have held stuck near three percent despite every reason to think they will move higher. I don’t expect this situation to change, and hence expect that on the curve will continue to flatten as long as the Fed continues to hike rates. An inversion is likely at some point in the foreseeable future. The Fed is likely to continue hiking after that inversion – and that is the point at which I would look for storm clouds on the economic horizon.
#shouldread
