Macro Digest: New lows in US yield indicate rising recession risk Macro Digest: New lows in US yield indicate rising recession risk Macro Digest: New lows in US yield indicate rising recession risk

Macro Digest: New lows in US yield indicate rising recession risk

Macro
Steen Jakobsen

Chief Economist & CIO

Summary:  ​Low in 30Y US yield & 2Y US yield > 30Y yield = Global recession risk 


Updated August 15 for clarity and minor text edits

The probability of the Fed cutting rates, even inter-meeting, is rising significantly as a recession is more and more likely and recessions mean an average sell-off in equities of at least 25%.

Policy Response?

  • The Fed needs to cut 50 bps and soon – maybe even inter-meeting
  • The Fed is behind and has been since last September – to get ahead the Fed needs to cut more than the Fed near-term premium (3 month expected Fed rate less the 18 month expected Fed rate indicates: - 60 bps presently – this needs to shift back higher, meaning the Fed will need to cut more now rather than later - perhaps 100 bps through the December FOMC meeting to start getting there - now only around 70 bps of cuts priced
  • An active weaker US Dollar policy is only week away – watch very closely as FX war starts its big engines

What to do?

  • Long GOLD – negative yield feeds both “official buying” and hedge buying: 1600 $ and then 1700 $ target
  • Underweight equity
  • Hedge long risk with long JPY, gold, short-term bonds
  • Keep a close eye on credit spreads which should widen (fall in price) :  EUR High Yield & US High Yield

Comment

On the day that German GDP went negative, the world biggest exporter - The world biggest importer: The US saw new all time lows in long-term yield – Random? Hardly

The Fed is behind the curve and has been since last September – their speed reduced by their fundamental belief in inflation targeting (and that the present weakness is transitory) – and now into a macro context they call: Regret Analysis. Sad state of affairs, but the main point being G-7 central bank lost their ability to change direction of growth – end of story.

Despite this they will give it another try – i.e. force rates down again. The only way to “move” market now in my opinion being a rate cut between scheduled meetings to force the front end lower, faster. Rip off the band aid rather than taking it slowly!

Also note that everything is unfolding in the context of falling international cooperation – read: G7 – the odds of a full foreign exchange war as an extension to trade policy spats is more than 50/50 now. The main policy choice will likely be a very aggressive rhetoric talking down the US Dollar followed by Fed cuts.

Source: Bloomberg

Trend is clear: by Q4-2020 the entire US yield curve will be negative?

Source: Bloomberg

Yield curves screaming recession!  2yr-10yr and Fed near-term premium (3 month Fed policy rate less versus 18 month policy rate)

Source: Bloomberg
Disclaimer

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 https://www.home.saxo/en-au/legal/.

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 (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

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

Contact Saxo

Select region

Australia
Australia

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

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.