United States: the fear of a recession

Growth is still vigorous, but clouds are beginning to gather.

In the financial markets, there are situations that investors would like not to have to observe. The inversion of the interest rate curve is certainly one of these. Because, when it occurs, it generally portends a recession, synonymous with an upcoming contraction in profits and a stock market downturn.

At the beginning of April, the yield on 3-year US government bonds thus amounted to 2.7%, while that of the “10-year” stood at 2.5%. A market anomaly that had the same effect as Will Smith’s slap in the face of Chris Rock in 94and Oscar ceremony! Indeed, the longer the investment period, the greater the risk and the higher the interest rate paid to bondholders must be accordingly.

A precursor signal

When this curve is inverted, as at present, the market anticipates a rapid increase in the key rates of the Federal Reserve, the central bank of the United States, in response to soaring prices, at a rate not seen for 40 years (nearly 8% over one year). At the same time, this rise in interest rates, fueled by inflation, is raising fears about long-term activity, which are therefore expressed by the decline in long-term rates.

According to Mitsubishi UFJ Securities, the yield curve thus inverted 422 days before the 2001 recession, 571 days before that of 2007 to 2009 and 163 days before that of 2020.

In the latter case, however, this historic recession (-3.3%) resulted mainly from the Covid-19 pandemic and not from the inversion of the interest rate hierarchy. The only time the curve reversed without leading to a recession was in 1998 during the Russian financial crisis, but this led to the rout of the hedge fund LTCM of sinister memory (a systemic crisis was indeed avoided barely).

Talking about a recession in the United States, when growth reached 5.7% in 2021, may seem incongruous to say the least. In the fourth quarter of 2021, activity even grew by 6.9% on an annual basis, according to figures from the BEA, with only three states out of fifty in decline (North Dakota, Nebraska and Iowa), the palm of the boom returning unsurprisingly to Texas (+10.1%), exploitation of oil and natural gas obliges.

And this good health of the American economy made it possible to bring the unemployment rate down to 3.6% in March, a level close to that before the pandemic, its lowest in 50 years.

The Fed in ambush

But the clouds are beginning to gather across the Atlantic, as evidenced by the first business surveys for the month of March, “proof that the harmful consequences of the Russian war in Ukraine are not confined to the borders of Europe, analyzes Jean-Luc Proutat, economist at BNP Paribas. Without collapsing, the confidence index of American households, calculated by the Conference Board, is hitting record highs.

In the Philadelphia and New York areas, the skies for manufacturers are darkening, probably also because the resumption of the Covid-19 epidemic in China promises to worsen the already high tensions on the supply chains .”

The latest statements by Lael Brainard, member of the Board of Governors of the Federal Reserve since 2014 and called to become the vice-president of the institution, will not reassure investors. This “dove”, until now favorable to an accommodating monetary policy, affirmed that the Fed should be “ready to act more strongly” against inflation (understand increases of half a point).

She also pleaded for a reduction in the balance sheet of the central bank as of its next meeting, on May 3 and 4. Wall Street has therefore not finished talking about the interest rate curve.

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