Of course, there are analysts like those at RaboBank who explain that the rate curves are totally distorted by the bond purchases made by the Powell Fed since the pandemic began. In any case, these experts consider that the crux of the question is whether one believes that the curve is a signal of recession or a trigger. Which is probably a combination of both, a kind of self-fulfilling prophecy.
Beyond the classic academic definition of a recession, the consensus is that a sharp slowdown is coming due to the Fed’s aggressive normalization of monetary policy, a sharp compression of real income and profits due to cost pressures, fears of consumers about the impact of the war on stock prices and therefore their savings, the decline in global demand as China implements its zero tolerance policy against the coronavirus; and a shift in fiscal policy from expansionary to contraction, as budget deficits shrink relative to the pandemic era. In this context, the market concentrates its attention on a few indicators or signals, among which are the prices of raw materials, stock market indices and others, which would provide the key to discern whether or not a recessive period is coming, which the British broker AJ Bell summed up five. Which are?
On the side of commodities, the price of oil and copper are the first two signs: the price of crude oil is considered almost a tax since it increases costs and reduces margins and cash flow of companies, and reduces consumers’ disposable income and their spending power. Although the recent rise has not yet caused a recession like in 2007-2009, it has damaged the already highly indebted world economy, and the feverish and excessively leveraged financial markets.
So if crude oil can be a trigger for a recession or at least a stagflation. As for copper, its multiple uses make this malleable metal a good indicator of the health of the economy. The good news is that the price of copper remains firm, despite fears about the Chinese economy and the slowdown in construction in particular. On the stock indices side, the Dow Jones Transportation/ Dow Jones Industrials is the third sign: the recent drop in DJ Transportation, a basket of shipping, rail, trucking and airline stocks, from the November high is discouraging , above all, in light of the Russell theory that says that the economy, and by extension the Industry DJ, cannot do well if the Transportation index does not do well.
The argument is that if the economy is strong and production is sold, stocks should be replenished and shipped; On the other hand, if the economy is weak and the goods are not selling, the shelves do not have to be filled, the goods do not have to be manufactured or moved, so trucks, planes, trains and ships remain idle. For now there are no signs of this but it should be monitored. The fourth sign is the so-called “Small Caps”, or companies with low market capitalization: the fall of these companies in the US and the EU is a cause for concern that also feeds back the slowdown story, and possibly the recession story.
It turns out that SMEs tend to be more dependent on the domestic economy and have less diverse customers and ranges of products or services, so they may be more sensitive to changes in economic momentum than S&P 500 or FTSE 100 multinationals. The last key is the SOX (Philadelphia Semiconductor) Index: This benchmark index of 30 global manufacturers of silicon chips and chip manufacturing equipment is also floundering despite a global shortage of semiconductors.
Silicon chips have become a good guide to the level of global activity, since they are found everywhere, from household appliances to servers, passing through cars, robots and cell phones or smart meters. They are also highly valued by investors looking for profits and/or stock valuations, becoming a good indicator of the risk appetite of the financial markets in general. SOX investors are watching for any signs of weakness in the major end markets for silicon chips, such as automotive, mobile devices, computing and servers, especially if energy, food and fuel prices rise.
Source: Ambito
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