HH What Are Credit Markets Signaling About The US Economy?

The US economy has been very resilient during this post-crisis business cycle, as we are now into our ninth year of economic expansion. Soon we could hit a record for the length of an expansion. Yet, with that backdrop, 10-year Treasury yields were at 2.13% this morning – even as the Fed signals more hikes to come in 2017 as well as reverse QE. I think the bond market is signalling continued low growth and low inflation. Some thoughts below

The Great 2016 Recession Scare

Remember the recession scare we had last year? I talked about this in March. But let’s give a full re-count here because people have forgotten where we were.

If you recall, in December, as 2015 came to a close, the Fed hiked rates for the first time in 9 1/2 years. Not only did the Fed hike, it produced the famous dot plot, showing 4 more interest rate hikes in 2016 and 4 in 2017. This was a mistake. 

I was uneasy about this move right from the start because the timing was all wrong. I said it created the potential for recession because the data did not support a hike — especially in the face of a massive decline in oil prices and the attendant energy capex bust. Even after the Fed hiked, oil prices continued to fall, and energy capex with it.  The final reading of first quarter US GDP growth came in at a measly 1.4% on the heels of 0.9% and 0.8% growth in the 2 previous quarters. That’s three consecutive quarters of stall speed numbers.

(Click on image to enlarge)

GDP growth was slowing. Job growth was visibly slowing too. In short, the economy was on its knees. 

So I went on recession watch in February, writing a post on how the Fed could cause recession in 2016. And here’s what I was saying:

“Now we have reached a point where the confluence of energy capex shortfalls, the impact of a strong dollar on earnings and exports and an incipient inventory purge has put the US economy in stall speed…

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