Yield curve inversion
The recent yield curve inversion (very short end versus 10-year) has received a lot of attention in financial markets as it has previously had a stellar record as a recession forecasting indicator. While it has been a good indicator and should have a high weight in investors’ decision-making, we should also recognise that the economy is very dynamic and recessions can play out differently.
All we know is that yield curve inversion indicates nervous investors and that things are clearly not well, which is likely one of reasons for the FOMC’s big pivot on monetary policy. The yield curve inversion is important and should be watched carefully.
Based on history, the timing between the yield curve inversion and a recession is fluid which makes decision-making difficult. Thus we recommend investors put a high weight on the yield curve inversion and watch other key indicators. As we highlighted in our monthly equity update back in February
, global leading indicators from OECD are still not supportive for global equities, so we still recommend investors to be defensive on equities.