US recession indicator flashes red as weak economic data triggers global stock sell-off
US recession indicator flashes red as weak economic data triggers global stock sell-off: Financial markets recoiled yesterday as poor German and Chinese data provided further evidence of a global economic slowdown. US and European equities were slammed while a bond rally in the US pushed yields on 10-year treasuries below two-year rates for the first time since 2007, raising fears of a US recession.
Germany is on the cusp of a recession: The German economy contracted in the second quarter as domestic manufacturers struggled to cope with declining global conditions. Data released by the Federal Statistics Bureau yesterday showed that output fell by 0.1% quarter-on-quarter from 0.4% growth in the first quarter of the year. Poor data from the country’s export-dependent industrial and manufacturing sectors had raised fears of an oncoming recession in recent weeks as global trade disputes continued to escalate. Manufacturing PMI fell to seven-year lows last month, and industrial output contracted unexpectedly by 1.5% in June. “[Yesterday’s] GDP report definitely marks the end of a golden decade for the German economy, ING analyst Carsten Brzeski told Reuters. “Trade conflicts, global uncertainty and the struggling automotive sector have finally brought [it]… down on its knee.”
China industrial output hits 17-year low: Industrial growth in China fell to levels not seen since 2002 in July, official data showed yesterday. Figures published by the National Bureau of Statistics revealed that industrial growth fell to 4.8% y-o-y in July, down from 6.3% in June. Analysts said that the weak data points to falling demand across the broader Chinese economy, and some are now forecasting renewed stimulus measures. “The economy is going to continue to slow down. At a certain point, policymakers will have to step up stimulus to support infrastructure and property. I think it could happen by the end of this year,” Macquarie Group’s Larry Hu told Reuters.
US and European equities are in the red: Major US stock indices were down 3% at the close of play yesterday: both the Dow and the Nasdaq fell 3%, with the Dow shedding 800 points, and the S&P 500 fell 2.9%. European stocks fared slightly better — although that’s not exactly saying much: the German Dax lost 2.2%, and both the Euro Stoxx 50 and the French CAC 40 sank 2%. The sell off spread to Asia in the early hours of this morning, with all major indices down at least 1.3% as of 04:00 CLT. “Investors are increasingly selling first and asking questions later,” Alec Young, managing director for global markets research at FTSE Russell, told Bloomberg. “The only thing seemingly capable of reversing the volatility is credible evidence global growth is bottoming out. That seems too much to hope for right now.”
The bond market is now signalling a US recession: The US treasury yield curve inverted for the first time since 2007 yesterday as investors seeking safe haven assets caused the yield on US 10-year treasuries to fall below the two-year rate. The yield on 10-year notes fell to 1.623% early in the day, below the 1.634% rate on two-year bonds, before recovering later on, according to CNBC. The rate on 30-year bonds also fell to a record low of 2.02%. The curve between two-year and 10-year bonds has proven to be an accurate predictor of recessions in recent history, becoming inverted before almost every recession over the past 50 years.
But not this time, says Yellen: Former Fed chair Janet Yellen tried to calm market fears yesterday, telling Fox Business Network that an inverted yield curve does not guarantee a recession. “Historically, it has been a pretty good signal of recession, and I think that’s when markets pay attention to it, but I would urge that on this occasion it may be a less good signal,” she said. “The reason for that is there are a number of factors other than market expectations about the future path of interest rates that are pushing down long-term yields”
Global banks are being hit hard: MSCI’s total return index of developed market bank stocks plummeted to near-record lows against the wider benchmark yesterday as inverted yield curves in the US and UK raised investor fears that banks will begin restricting credit, Bloomberg reports. “Bond yields are pricing in Armageddon,” said Roelof Salomons, chief strategist at Kempen Capital Management NV. “The concern is that lower rates will keep economies and corporates afloat but such policy hurts banks’ profitability.”
And Trump has predictably weighed in on social media, once again aiming fire at US Fed chairman Jay Powell: “Our problem is not with China… Our problem is with the Fed. Raised too much & too fast. Now too slow to cut… Spread is way too much as other countries say THANK YOU to clueless Jay Powell and the Federal Reserve. Germany, and many others are playing the game! CRAZY INVERTED YIELD CURVE!”he haphazardly wrote on Twitter.