This Market Indicator That Frequently Signals a Recession Just Flashed Red

Upon closer scrutiny, investors said a deal between the world's two biggest economies was far from a sure bet. And the reason has something to do with an occurrence that is not exactly in the everyday investor's lexicon: an inverted yield curve.

Interest rate hikes have sent short-dated yields higher, even as slowing economic growth expectations have kept longer-dated yields down.

Lingering uncertainty regarding China and the United States' ability to resolve their trade war provided some support to the greenback. The 10-year Treasury note yield fell about 6 basis points to 2.498% Tuesday, its lowest since September 13, while the spread between 2-and 10-year notes dropped to 0.14%, the flattest level since June 2007, setting the tone for a possible inversion of spreads in the future.

USA stocks slumped almost three percent on Tuesday on some of the same growth concerns influencing bond investors as well as on doubts China and the United States would resolve their trade spat. It reflects the idea that the Fed is slowly hiking the economy into recession. On Tuesday, the Dow Jones Industrial Average fell almost 800 points, or 3.1%, largely in response to recession fears stoked by recent changes in the yield curve.

"If that's the case, obviously the dollar has had a nice run, I think we may be seeing the top on the dollar", he said. Inverted yield curves have historically occurred during periods of economic recession.

The theory may get a test soon.

On Monday, 2- and 5-year Treasury yields inverted, meaning the shorter dated 2-year money became more expensive than the later maturing 5-year.

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The dollar struggled in the wake of falling Treasury yields, with its index against a basket of six major currencies briefly stooping to a near two-week low of 96.379 overnight before edging back above 97.00.

"Investors are coming around to our downbeat view of the prospects for the US economy", analysts at Capital Economics wrote on Tuesday, arguing that there was no reason to regard this pending yield curve inversion as different from others. "You have worries about growth".

It has sometimes taken more than a year for a recession to occur after the yield curve inverts.

While some regional bank presidents have been explicit in arguing the Fed should hold off raising rates to avoid an inversion, the consensus has been consistent: stay the course. National Australia Bank analysts said in a note to clients. Powell in remarks last week reiterated his upbeat outlook of an economy growing above potential, with the unemployment rate the lowest in almost 50 years, and in no need of emergency level interest rates.

The flattening of the curve gained momentum after last week's signal by the Federal Reserve that it may be nearing an end to its three-year rate-increase cycle. "If twos and tens invert between now and December 18, the Federal Reserve is going to have to take out some of the hikes next year-or they should do it", Joseph Lavorgna, chief US economist at Natixis, told Reuters.

And while interest rates have been unusually low for most of the past decade, Bauer and Mertens believe the prophetic power of the inverted curve still applies. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. "I'm anxious that they won't". Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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