U.S. Treasury bond yields were active again Monday, with benchmark 10-year notes breaching a key technical level that could triggered renewed bets on a near-term recession in the world's biggest economy.
Surging inflation, supply chain disruptions and the Federal Reserve's newly-aggressive signaling on interest rates, alongside worrying signals from the housing market, have combined to accelerate recession bets as growth slows from last year's torrid post-pandemic pace.
The difference in yield, or spread, between 5-year notes and 30-year bonds inverted for the first time since 2019 in overnight trading, while the gap between 2-year and 10-year notes narrowed to just 15 basis points.
Bank of America's closely-watched Flow Show report last Friday noted that bond market outflows extended into an 11th consecutive week, the longest since the financial crisis of 2008.
Fixed income traders are also betting on half-point moves higher in the Fed Funds rate at the next three Fed meetings in May, June and July, according to the CME Group's FedWatch, even as the Atlanta Fed's GDPNow forecasting tool suggests first quarter growth has slowed to just 0.9%.
According to a study from the San Francisco Federal Reserve, an inverted yield curve -- where 2-year note yields leap past 10-year yields -- has preceded all of the nine recessions the U.S. economy has suffered since 1955, making it an extremely accurate barometer of financial markets sentiment.
All that said, many remain adamant that the U.S. economy remains on solid footing.
"It's very hard to see why the private sector would feel compelled by a Fed Funds rate of 2% or so by the end of this year to cut back spending to the point where the economy might tip into recession," said Ian Shepherdson of Pantheon Macroecnomics. "That's not to say the whole economy will roar ahead; we expect a steep drop in housing market activity over the next few months, as potential buyers react to the massive deterioration in affordability over the past few months."
That view was largely expressed by Fed Chairman Jerome Powell earlier this month, when he told lawmakers on Capitol Hill that the U.S. economy is strong enough withstand a series of rates hikes, and encouraged his colleagues to follow him on a quicker path to 'normalized' interest rates between now and the end of the year.
"We still think above-trend growth is very likely in 2022 and recession risks remain low, even though they have increased," said Jeffrey Roach, chief economist for LPL Financial in Charlotte, North Carolina, citing high frequency data on consumer spending trends that remain relatively robust, but is nonetheless showing signs of pullback.
"Much of the hard economic data such as the latest monthly job figures and retail sales were collected before the economic impacts from the Russian invasion and before the subsequent sanctions imposed on Russia," he said. "Slower weekly credit card spending during March points to slower growth and demonstrates the heavy burden on consumers from rising prices."
With that in mind, this week's plethora of job market data will go a long way towards defining the state of consumer confidence heading into the second quarter, as gas prices surge, inflation continues to accelerate and sentiment takes a hit from Russia's war on Ukraine.
Friday's March non-farm payroll report is expected to show that American employers added a net new 475,000 jobs to the economy, with the headline unemployment rate holding at 3.8%. What may prove more pertinent, however, is the pace of gains in terms of average hourly earnings, which flatlined last month but could rebound sharply -- adding to inflationary pressures -- as companies race to fill the more than 11 million unfilled positions in the nation's job market.
Further details on that will come Tuesday from the Job Openings and Labor Turnover Survey Tuesday, as well as payroll processing group ADP's National Employment report on Wednesday.
