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
Picture of Steen Jakobsen
Steen Jakobsen

Chief Investment Officer

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

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research 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. To the extent that any content is construed as investment research, you must note and accept that the 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 under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
Full disclaimer (https://www.home.saxo/legal/saxoselect-disclaimer/disclaimer)

Saxo Bank A/S (Headquarters)
Philip Heymans Alle 15
2900
Hellerup
Denmark

Contact Saxo

Select region

International
International

Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

This website can be accessed worldwide however the information on the website is related to Saxo Bank A/S and is not specific to any entity of Saxo Bank Group. All clients will directly engage with Saxo Bank A/S and all client agreements will be entered into with Saxo Bank A/S and thus governed by Danish Law.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.