Stumbling into a storm? Stumbling into a storm? Stumbling into a storm?

Stumbling into a storm?

Macro 5 minutes to read

Summary:  Asian markets began the week with substantial losses as the region followed Wall Street's Friday example where sentiment deteriorated after the inverted US yield curve stoked recession fears.

Globally, yields are collapsing. In Europe, the German 10-year bund yield has fallen below zero for the fist time since 2016, as Europe’s wilting growth was once again confirmed after PMI readings from Germany and France refuted a Q1 rebound. Germany’s manufacturing slump continued with the IHS Markit manufacturing PMI falling to 44.7, the lowest level since 2012 and considerably missing economists’ expectations of 48. Weakening global demand, the trade war, Brexit and a troubled auto industry are all contributing to the slowdown, stoking fears that Europe could be leading the global slowdown.
The picture got uglier as data confirmed US manufacturing also stumbled. The US manufacturing PMI hit a 21-month low and the manufacturing output sub-index dipped to 51.6, the lowest level in almost 3 years, plagued by softening global growth and weaker external demand. 

The slew of data confirming the global slowdown, coupled with the Fed downgrade to growth earlier in the week, reignited growth concerns causing a collapse in bond yields. Consequently, the gap between 3-month and 10-year rates is now negative, for the first time since 2007, which has previously been a reliable indicator of recession. The yield curve is the best forecasting tool for recessions, having inverted before each of the last seven recessions according to the National Bureau of Economic Research.

This inversion means that the interest rate (or yield) on 3-month US Government treasury bills is higher than the interest rate on 10-year Government treasury bonds. This signals lower interest rates in the futures as demand for longer-term bonds has risen. Conversely, when investors expect the economy to be stronger in the future, the yield curve will slope upwards. Banks borrow short and lend long, thus when the yield curve is inverted the ability to lend profitability is less and hence incentive to lend can be reduced.

Whilst this inversion creates concern, a recession in the near term is not a foregone conclusion. Although if you still believe in a business cycle, a recession is eventually inevitable. Typically, the magnitude of inversion preceding a recession is deeper than current levels and more persistent. That is not to say we won’t see a continued and more pronounced inversion, but before sounding the alarm bells of recession, it is prudent to wait for an improved signal (a deeper inversion, and subsequent re-steepening).

So whilst an inverted yield may not mean a recession is looming right around the corner, it is undeniable that the outlook for the global economy is below par and growth will be subdued. 
This weak data and subsequent inversion of the US yield curve has laid to rest the positivity we have seen in equity markets since December lows. Ahead of last week’s Federal Open Market Committee meeting, the concern was whether the Fed would be able to live up to the market’s dovish expectations. But these concerns turned out to be misplaced as Fed chair Powell at every turn managed to outdove expectations, doing little to quell concerns that the Fed are no longer independent and capitulated to the demands of President Trump.

The Fed has given the punch bowl back to the market. They will “stop with the 50Bs” (the balance sheet unwind), tapering the unwind from May 2019 and ending in September 2019, and have priced out any further rate hikes until next year at the earliest.

But we already knew the Fed had shifted back in January and most of that accommodative bias is priced in, since that January dovish pivot there has been a lot of rhetoric that would suggest that Fed would tolerate running the US economy hot and inflation is nowhere to be seen. The latest dovish chant could just be squeezing the last bit of juice out of an already over extended rally.

Historically a “dovish” Fed is not necessarily a good sign as it announces that an economic downturn is on the way. And the bottom line is growth is slowing.

We are now reaching that point where the weakening fundamentals are catching up with the equity market, the equity market which has been buoyed by buybacks is waking up to the fact that the Fed is not raising rates because US economy needs support and is weak just as we approach the buyback blackout period.

After a quarter of optimism, the realities are setting in and Australia is no exception. The rally in global bond yields has not missed Australia, on Monday morning the 10-year bond opened below 1.8% for the first time on record, and hit a record low of 1.756% as global growth concerns gripped the markets. In the last 20 days, yields have collapsed 44bps, reflecting the deteriorating outlook for the global economy but also the Australian economy and inflation expectations collapsing, something we have discussed at length.

Quarterly Outlook 2024 Q3

Sandcastle economics

01 / 05

  • Macro: Sandcastle economics

    Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

    Read article
  • Bonds: What to do until inflation stabilises

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

    Read article
  • Equities: Are we blowing bubbles again

    Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

    Read article
  • FX: Risk-on currencies to surge against havens

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

    Read article
  • Commodities: Energy and grains in focus as metals pause

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

    Read article

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (
- Analysis Disclaimer (
- Notification on Non-Independent Investment Research (

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000

Contact Saxo

Select region


The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.