That was fairly the flip within the markets final week. The whiplash from bullish to bearish motion has everybody whispering the phrase “recession.” Earlier than we panic, let’s assess what’s really occurring within the markets.
After rising sharply midweek following a reasonably dovish Fed assertion, sellers started shedding shares at a ferocious clip. Most indices have been down 3-5% throughout August’s first two buying and selling classes. In the meantime, choices buying and selling ranges have been off the charts (August could method a report quantity!).
On Friday, the VIX hit 29%, and the put/name ratio was over one. The concern within the air was palpable.
As fairness markets declined, bond markets rallied arduous – no shock there. The ten yr Treasury yield fell to simply under 3.8% on the shut Friday, the bottom stage since final December. At the moment, markets have been about to complete up on a robust yr of buying and selling. Nevertheless, given seasonal patterns, it begs the query: Are low yields predicting one thing extra ominous?
The bond market might imagine a recession is coming
Perhaps! Perhaps the bond market is anticipating a tough financial interval forward. When yields fall this rapidly, it typically means individuals are leaning too arduous in a single route.
I consider some bond brief sellers needed to cowl their positions rapidly as financial information (rising unemployment) confirmed slower progress within the again half of the yr. If the job market deteriorates and might not information us in the direction of a comfortable touchdown, we may see layoffs, even slower progress, and probably a recession. Therefore, bond patrons have been reaching for yields by the tip of the week.
However are they improper?
Bond buyers are paranoid. They’ve predicted six of the final two recessions.
However we will’t ignore the concern of an financial slowdown. The Fed Funds Futures market is speculating much more fee cuts in 2024 than the Fed has mentioned publicly. Some large banks like Goldman Sachs and Citigroup are predicting fee cuts all the way down to 4% (from the present 5.25%), which is extraordinarily aggressive.
The final time the market disconnected from the Fed’s “gradual” message was in April, when markets swiftly dropped 4-5%. The aggressive Fed Funds Futures retreated rapidly to align with the Fed’s message. Will they this time? We’ll discover out.
For now, let’s watch the info. If cooler heads can prevail, everybody will possible change their tune. And if a recession occurs, we’ll be prepared.
