According to The New York Times, patterns of global financial markets in the past few weeks may be a sign of an oncoming recession. From different perspectives, nothing seemed to be out of the ordinary. As of Wednesday noon, the S&P 500 fell for the second consecutive time at about 1.2% but is down only about 6% from its early May high. The unemployment rate is at an all-time low within the last five decades and nearly 76% of major companies reported with having results above expectations for the first quarter.
However, global bond prices have soared, resulting in a sharp decline on interest rates. Ten-year Treasury bonds are yielding at a full percentage below its value since this past November. As the prices of oil and other commodities continue to fall, inflation in the following years will follow.
Most significantly, we are experiencing an inverted yield curve in which the fall in longer-term yields have not been matched by a fall in shorter-term rates, and that has been historically seen as a sign of an approaching global recession. This is an indication that the Federal Reserve will soon need to cut interest rates.
According to an analysis from Morgan Stanley, the stock market and economic outlook in the U.S. are deteriorating. Morgan Stanley warned that U.S. profits and economic growth are at risk as durable goods and capital spending in the services sector continues to decline. A survey from financial data firm IHS Markit indicated that manufacturing activity declined to a nine-year low this month, further revealing a “notable slowdown” in the U.S. services sector.
The stock market dropped on Tuesday, adding to the significant losses for this month. “The Dow fell 237 points and the S&P dropped 0.8% during the session; they are down 4.6% and 4.8%, respectively.”
Many companies are now shifting their focus onto Trump administration’s escalated trade war with China and said it could have an impact on their businesses when the White House increased the tariff rate on Chinese imports from 10% to 25% this month.
However, it may be early to assume that a recession is in the offing especially with the latest interactions between the U.S. and China regarding Huawei. The Federal Reserve may be taking a precautionary interest rate cut for the time being and eventually return to a normal state in a few months.