The bond market doesn't believe the hype
Illustration: Aïda Amer/Axios
Stocks roared higher on Tuesday after news that some Chinese imports would be spared from a 10% tariff increase the Trump administration plans to impose on Sept. 1, but the bond market was unimpressed and continued to push yields lower, tipping a strong recession indicator.
Why it matters: Bonds have been accurate in predicting Fed policy and U.S. economic indicators all year. Tuesday's market action shows investors believe the damage has already been done to the world economy — and that this temporary respite in the trade war is likely too little, too late.
The big picture: The bond market has consistently priced in the negative effects of the trade war, triggering recession alarms this year that have been accurate since World War II.
- Those alarms have included the inversion of the 3-month/10-year Treasury yield curve and the New York Fed's recession probability indicator hitting its warning level.
- This morning, the 2-year/10-year yield curve inverted, the recession indicator watched most closely by banks.
The stock market, on the other hand, has rallied on any good news about the trade war and renewed communication between China and the U.S., which has generally proved fleeting and short-lived.
What they're saying: "Talking is good, but there has been a lot of talk since Trump and Xi met in Buenos Aires last November, and not much progress," Lou Brien, market strategist at DRW Trading, tells Axios in an email.
- "The high level of uncertainty has been quite negative for business planning and spending on capital expenditures, which has in turn caused several important indicators to roll over, such as the ISM indexes, Industrial Production and orders for Durable Goods."
Catch-up quick: Global economic data has consistently worsened in 2019, with Japan and 3 of Europe's 4 largest economies — Germany, Italy and the U.K. — heading toward recession by year-end, and China growing at its slowest pace in 27 years.
- Central banks around the world have started cutting interest rates en masse, and policy is the most dovish it has been at any time since the global financial crisis, according to data from Goldman Sachs.
- Stock investors are viewing the policy shift as evidence that growth will pick up and underpin a rally, while the bond market sees it as a sign the economy is in peril.
What to watch: The inverted 3-month/10-year yield curve, which most recently touched -35 basis points, and the 2-year/10-year inversion have preceded every recession in the past 70 years.