Concerns about a recession are spreading, but the situation is different from the Lehman Brothers shock [from YEN Kura’s newsletter]
From the real-time investment newsletter "Real Top Trading" by YEN-kura provided by GogoJungle, here is a portion from the issue distributed on the 18th.
【Market View】
The market during the Obon holiday week saw accelerated risk-off moves. The biggest factor pushing down stock prices and accelerating yen appreciation was the inversion of the US short- and long-term interest rates. With the 2-year US Treasury yield and the 10-year yield in reverse, the market sensed a recession risk and stock prices declined, which acted as a trigger. The 3-month treasury yield is currently around 1.86%, and this short-term bond closely tracks the Fed's policy rate (the federal funds rate). The 2-year yield closed near 1.487% on Friday, which is also a maturity highly susceptible to the Fed's monetary policy. And the 10-year yield closed on Friday at 1.5623%.
There was also talk about the inversion between the 3-month and 10-year yields, but this time the more notable inversion between the 2-year and 10-year yields occurred briefly on the 13th, raising concerns about the future US economy entering a recession, which accelerated the downward pressure on stocks and risk-off moves in the yen. There is an empirical rule that when a recession has occurred in the past, it happened within 6 to 18 months after the 2-year and 10-year yields inverted. In past patterns, when the economy was solid and stock prices rose, inflation rose and the Fed raised rates, the long- and short-term rates inverted, eventually leading to stock price declines and a recession. The last time this happened was during the Lehman Brothers crisis, when the inversion occurred when rates were above 5%. Currently, the trigger could be the US-China issue. The current inversion is around 1.5%. The situation is quite different from Lehman, and even if an inversion occurs, there would be a considerable time before a recession sets in.
I think the reaction to the inversion of the long and short rates was excessive, but I am also concerned that the reaction to the postponement of U.S. USTR tariff actions on China from September 1 to December 15 has been modest. In the past, President Trump would have strongly pushed back if he had improved the US-China issue, but this time bond yields have risen, stocks have risen, and the yen has weakened less vigorously than in previous rebound periods.
Last week, emerging markets also fell. Argentina’s presidential primary result, where President Macri, who had pursued market-friendly policies, placed second, raised concerns about reelection, and Argentine equities and the peso collapsed. The rand, Turkish lira, Russian ruble, Mexican peso, and Brazilian real all dropped. The yuan and the Korean won rebounded, but the decline in emerging markets suggests that the market remains unable to fully rebound. Looking at the current US economic data, the 1.5% yield on the 10-year suggests that two rate cuts might be excessive, but there is a possibility that money is flowing into US Treasuries, the only high-yield asset among developed nations. The decline in bond yields seems excessive, but as long as yields stay low, the market is likely to remain unstable.
This week, attention will be on the FOMC minutes to be released on the 21st and Powell’s remarks at the symposium in Jackson Hole on the 23–24th. It will be a week to test whether stocks, USD/JPY, and cross yen pairs can stabilize and rebound.
From YEN-kura’s real-time newsletter “Real Top Trading” (Takeo Tashiro)Quoted.
This week features the FOMC, Powell’s remarks, and other important events. Especially as concerns about entering a recession are spreading, we will be watching closely how Chairman Powell perceives the current situation. (Editor)
