The yield curve (difference between 10-year and 2-year US Treasury bond yields) has historically steepened by 1% before or during recessions, including the Great Depression, 2007 financial crisis, and 2020 COVID-19 recession.
Despite yield curve steepening, current economic indicators like 2% US GDP growth, strong job market, and all-time high stock market suggest a recession may not be imminent.
Based on 2007 patterns, the yield curve steepening could continue until January 2025 before a potential recession begins.
Initial jobless claims, which have 90% correlation with the yield curve since the 1960s, are unusually strong despite recent yield curve steepening.
Stock markets often fall before recessions but can rise until the last moment, as seen in July 1990, February 1980, and September 1929, suggesting investors should maintain flexible equity strategies.
The Fed’s pivot from fighting inflation to supporting labor markets could shift the economy from an income-driven cycle to a credit-driven cycle, potentially adding “rocket fuel” to an already strong economy.
The Fed’s aggressive 50-basis-point rate cut in July 2022, despite a strong economy, marks a change from a sensitive, slow-moving approach to a proactive and accommodative stance, which could reignite inflationary pressures.
The dock worker strike highlights a tight labor market, indicating elevated wage inflation and potentially challenging the Fed’s disinflation narrative.
A crackdown on unauthorized workers in the US, particularly non-high school educated workers, could lead to significant labor shortages and price increases, especially in the construction and food industries.
China’s housing market, the world’s largest asset class, faces a deleveraging crisis with $1 trillion of unsold apartments, requiring fiscal easing and debt restructuring to resolve.
Household balance sheets are at record highs, with net worths expanding 4X over the past couple of decades, but a significant wealth gap exists between asset owners and non-owners.
Gold has been the best-performing major asset class recently, outperforming bonds in 50% of equity drawdowns and serving as an inflation hedge and alternative money.
The Fed’s balance sheet is in a state of excess liquidity, with banks holding vast reserves, allowing the Fed to manage monetary policy on the margin but largely discarding the asset-selling lever for tightening.
Sticky inflation and jobs reports following Federal Reserve interest rate cuts will likely lead to significant market volatility, creating exciting opportunities for traders.
Technical analysis of JPMorgan Chase, the world’s largest financial institution, shows a top formation in late August, followed by a downward trend without new swing highs.
The U.S. dollar is crucial for trading, with ending diagonal and positive divergence on the RSI suggesting a potential upward movement.
Quarter-end on September 30th and upcoming jobs numbers will significantly impact inflation and employment reports, contributing to market volatility.
The Federal Reserve faces a “sticky situation” if it cuts interest rates while inflation doesn’t decrease as expected, potentially complicating market conditions.
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