Previous Research US Heavy Weight Truck Sales & Yield Curve
In recent times, the US has witnessed a clear decline in inflation, leading to a strong market rally. The S&P500 has surged by 20% since its lows in October 2022, and news of a new bull market seems to be flashing everywhere. However, amidst all the market euphoria, one crucial indicator that has accurately predicted downturns, the yield curve inversion, continues to flash red.
The Yield Curve Inversion’s Warning
While market participants, including Federal Reserve Chair Jerome Powell, expect a soft landing scenario, history suggests otherwise. Looking at past instances, the two known soft landing scenarios, in 1985 and 1995, witnessed a percentage of yield curve inversion of 50%. On the other hand, all hard landing scenarios (except the flash recession of 2020) experienced a percentage of yield curve inversion of over 70%. This flawless track record in predicting hard and soft landings raises doubts about the likelihood of a soft landing this time.
The Question of Failure or Delayed Downturn
Now, the question arises: has this indicator failed in the current situation, or are we yet to witness the true onset of a downturn? It is crucial to note that market selloffs usually occur precisely when optimism reaches its peak and people believe that the worst is behind them. This historical pattern emphasizes the need for caution and the importance of safeguarding portfolios, as discounting the possibility of a recession would be hubris.
While the market euphoria may be pervasive, it is important not to dismiss the possibility of a recession and be overexposed to the present AI-frenzy.
Can US Skip the Recession?
The most recent labor market data paints a concerning picture of overall weakness. Typically, the effects of changes in interest rates take some time to ripple through the economy. Historically, this lag has been around 18 months. Interestingly, this pattern held true as, precisely 18 months after the initial rate hike in March 2022, we are now witnessing the visible impact this month. The Federal Reserve consistently raised rates throughout 2022, suggesting that the consequences of these consecutive hikes will continue to materialize as the year unfolds.
SP500 & Inflation Update: Aug 2023
Airtham Macro Research: The July headline CPI release followed predictions of a slight increase, yet the actual magnitude was less significant than anticipated. This outcome sparked optimism within the market, leading to a surge in activity and speculation of a potential pause in rate hikes. However, this optimistic rally was short-lived as market participants quickly adjusted their expectations. The weaker-than-expected inflation reading meant a potential decline in economic demand. This perspective gains support from jobless claims data released a few days back, that showed claims rising to a 1.5-year high. Consequently, there's now a debate over whether further inflation reduction is beneficial or detrimental to the markets.
What’s Happening to US Tax Receipts?
One of the most crucial indicators for gauging the health of a country lies in its government tax receipts. When tax receipts rise in tandem with economic growth, it signals a thriving nation. Conversely, economic downturns often witness an accompanying decline in tax receipts. However, what's truly concerning is when tax receipts decline despite a healthy and expanding economy.