Economic data has been weakening for weeks, culminating in a horrible Jobs report on Friday, August 2.
US Treasury Yield Changes
- 2-Year: Yield on the 2-year US Treasury note declined 28 basis points (.28 percentage points) on Friday leading the plunge. In the last three days, the 2-year yield plunged nearly a half-point.
- 10-Year: Yield on the 10-year US Treasury note declined 19 basis points on Friday. In the last week, the 10-year yield plunged nearly a half-point, taking four days longer and more evenly spread out than the change in the two-year yield.
- 30-Year: Yield on the 30-year US Treasury note declined 16 basis points on Friday. In the last week, the 30-year yield plunged 43 basis points.
US Treasury Yield Spreads Daily
Steepening and Bigger Inversions?!
The long-end of the curve is more inverted (the long end yield minus 3-month yield is increasingly negative), while the long-end vs. the two-year yield dramatically steepened.
The 10yr-2ry spread is about to turn positive. The 30yr-2yr turned slightly positive on July 15 then dipped negative. The 30yr-2yr spread then turned positive on July 23 and is now the most positive since June 7, 2022.
Many view the yield curve steepening as a recession confirmation indicator, but the signal is not that reliable. However, the sudden steepening does add to other data that also suggests recession.
US Treasury Yields Daily
Why the Waterfall?
July 31: Small Business Employment Growth Is Now Negative (and What It Means)
ADP data shows year-over-year payroll growth is negative 88,000 for small corporations sized 20-49. Trends are negative in all but very large corporations.
August 1: The Manufacturing ISM Index Is Lower Than Every Economist’s Estimate
The ISM manufacturing report was a disaster from every angle, especially employment , production, and backlogs. Employment reading worst since June 2020.
August 1: Commercial Construction Spending Is Down 9 Consecutive Months
Here’s the kicker: It’s not office related. And the Census Department has heavy negative revisions to spending. Let’s investigate.
August 1: Intel Announces 15,000 Job Cuts, 15 Percent of its Workforce
Intel received $8.5 billion in Biden administration grants (Inflation Reduction Act) but announces massive layoffs and halts dividends due to a decline in revenue.
August 2: Unemployment Rate Jumps, Jobs Rise Only 114,000 with More Negative Revisions
The headline jobs number was much weaker than the consensus estimate of 180,000 and the unemployment rate rose 0.2 percentage points.
Recession Has Started
On July 8, I wrote Weak Data Says a Recession Has Already Started, Let’s Now Discuss When
I’ve seen enough. A recession has started. Let’s discuss starting with a very good indicator that has few false positives and no false negatives.
My follow-up post was on August 2.
August 2: The McKelvey (Sahm) Unemployment Rate Recession Rule Just Triggered
A recession indicator based off rising unemployment triggered in July. Claudia Sahm, a former Fed economist, takes credit for an indicator she did not invent. Let’s discuss.
Weakening data explains the recession call. Yield curve action provides a confirmation signal.
I deleted all the BS nitpicking over one word and replies to it.
If you have anything to say about bonds or the charts in this post, go ahead.
Who is buying the bonds? Where are they pulling the money from? Or is it just cash that they were going to throw onto the stock market bonfire?
A rapid fall in long term bond yields, that’s disproportionate to the decline in equities, doesn’t make sense unless they’ve been manipulated. Powell talked about adjustments to FFR, QE was never mentioned.
10 years ago 2014, Yellen took 10-year Treasury yields to the lows of the mortgage crisis. Even though the collapse began 7 years earlier. She has devised a policy with the Fed, to repurchase her prodigality at lower rates. By limiting long-term debt issuance, public transactions are disproportionally magnified, hastening the decline, while supporting a progressive administration.
A newly published white paper accuses the Treasury of conspiring to boost the economy for political ends. The paper states the Treasury has adjusted the maturity profile of its debt issuance, to finance an outsize chunk of U.S. debt with short-term Treasury bills. This has neutralized the Fed’s tightening of long-term debt, to cool the economy. The authors term this “activist Treasury issuance”. The paper calculates over the past nine months, the Treasury’s excess issuance of bills is similar to roughly $800B in QE.
$800B in nine months is $89B/month. When Powell pivoted in 2018 (to repurchase 10-year Treasuries from the mortgage crisis), he acquired Treasuries at $80B/month by the end of 2019. 10-year Treasury yields fell 44 percent. The pandemic hit in 2020, and Powell had to take rates into the hyper-inflationary basement. A long-term graph of inflation indicates prices spiraled in 2019, a year before the pandemic.
The 54 month low in interest rates is coming in.
What if the growth and decay of the global macroeconomic system’s asset valuations were both deterministic and quantitative, QE begets a series of events including money/debt expansion, employment growth, further credit growth based on that employment, and asset valuation increases (beyond expected estimated time periods) that results in observable peak asset valuations. Inflation caused by the original QE (and the failure of government to control corporation consumer price gouging) results in unacceptable consumer inflation which results in central bank QT. The central bank uses peak equity, house inflation, and food inflation as a benchmark to continue and thereafter (upon initial asset valuation collapse or nonlinear collapse) to lower rates. As an aside the European, the Japanese, and especially the Chinese macroeconomic parameters are much worse shape than the US.)
When the did the global recession actually begin?
After a severe end 2024/ 2025 global recession, the Fed will begin a 32 year ratcheting up QE program and (with the assistence of the US coordinated nuclear arsenal) assume the role that the Bank of Japan has assumed for the financing of its 260% deficit/GDP ratio.
Currently money is flowing from the collapsing global equity market after a peak on 16 July (ASWI) into long term US note notes and bonds driving interest rates on sovereign instruments sharply lower. The very short term(3 months) minus long term sovereign debt instrument rate inversion has actually worsened in recent days and is about 630 days in length, longer than that leading to the 1929 peak DJIA valuation.
Expect an initial (and follow-through) quantitative mathematical collapse of global composite equity prices.
What gets me is the government gives all these companies like Intel money, and the help seems to be very short lived. As soon as things go south again they make cuts, what happened to all the money?
Same with defense contractors. Yes they do important work, but the bean counters get their way more than the technology does. Saddening.
The Usual Stimulus Tricks Won’t Work This Time Around
The global economy is slowing, and central banks and governments are deploying the usual stimulus tricks: 1) lowering interest rates to encourage more borrowing and spending, and 2) running large fiscal deficits so government spending fills the gap left by sagging private-sector spending.
But these usual stimulus tricks won’t work this time around, and the reason why is very simple: all the conditions that allowed these tricks to work were one-offs that are now done and gone. These one-offs weren’t policies that can be tweaked or reinvented; they were real-world conditions that are no longer present. They cannot be brought back with any amount of money or will.
Let’s start with China.
https://charleshughsmith.substack.com/p/the-usual-stimulus-tricks-wont-work
One-offs? This is the playbook from the last century.
If they lower rates what will investors do with their cash, sit on it and watch it lose value?
They’ll Jump right back into the pool bc rate cuts mean the currency is proceeding towards its demise
Hyperinflation ahead?
Don’t worry, we have a bunch of suits and their five-star Generals sitting around a table as we speak trying to figure out how to make Iran shoot first.
Charles Hugh Smith made a strong case, full of nice charts, around 2010? that the recovering housing market still needed another significant leg down (in price) because it hadn’t yet touched the long-term trend line and that according to history, it was likely to even overshoot that lovely trend line by a little bit. BOY WAS HE WRONG. He didn’t see the effects of QE coming at all. I looked like such a fool telling people not to buy homes in 2010 because CHS drew a chart that showed how you could still lose equity! Needless to say, I won’t give any weight to his opinions after that :-). In fairness (to me), I knew nothing about the difference between stock charts and housing charts back then, and clearly neither did he.
I listened to a podcast, “Forward Guidance” and Mike Green was on: he sharpened my understand of “passive investing” and money flows and he supports Mish’s assertions that Buyers need sellers and vice-versa – – but you all knew that. It goes much deeper than that I am switching to Youtube to look at Mike’s Charts. I was audio only early this morning.
Mike is one sharp guy. I have money parked at Simplify Asset Management, the ONLY part of my portfolio that I am trusting to someone else. Otherwise, I have self-directed my Family Offices since 1992 when I retired at nearly 40 after selling my own Company.
HE IS ONE SHARP GUY and even Mish would enjoy Mike’s appearance on that Podcast.
Of course we are in a recession. The weekly pattern on the S&P is 3 BLACK CROWS.
This pattern is a change in trend from bullish to Bearish. Things can change though. Being an election year, the Fed can ease, and off we go.
They opened the petrolem reserve to keep gas prices low for this summer. Why wouldn’t they just ease and let the folks feel happy about unrealized gains in their 401k. Many will never retire, as a New system is being implemented right under our very noses.
heck, your 401ks are up and you feel good for the election. Im not mentioning Politics. I am Apolitical.
“ They opened the petrolem reserve to keep gas prices low for this summer.”
Not exactly. They released ALL 1 million barrels of “gasoline” that was in the gasoline strategic reserve, which was a mandated release. Which is a pittance compared to the 9 million barrels of gasoline consumed in the US each day.
The Strategic Petroleum Reserve (SPR) in comparison is being refilled. 28 million barrels have been added in the last year. And more are scheduled to be added.
Gasoline has a shelf life, even if you add stabilizer to it. You can’t keep it long-term.
https://whyy.org/articles/gasoline-northeast-us-reserve-1-million-barrels-release-biden/
“As an analyst, this reserve never really made a whole lot of sense to have,” De Haan said in an Associated Press interview. The reserve is very small and must be frequently rotated, “because gasoline has a shelf life,” De Haan said. “That’s why there’s really no nation that has an emergency stockpile of gasoline” other than the U.S.
The Biden administration has since begun refilling the oil reserve, which had more than 367 million barrels of crude oil as of last week. The total is lower than levels before the Russia-Ukraine war but still the world’s largest emergency crude oil supply.
I see Zero Hedge reporting Buffet is reducing his stock holdings, especially Apple.
Sounds like he also believe the market is at a top and we are headed or are just into a recession.
Is Warren Buffet still calling the shots at Berkshire???
Who else dares to usurp the control from the owner/creator/head of the household? Would Warren surrender the control? Yeah there are non-Buffet names steering the various business units, but will his heirs not have a say on big decisions/ideas (theirs or the hired managers’) ?
Buffet, like just any legendary long term investors, is a man of plan and discipline. He has no reason to surrender the control to outsiders, never had, and unlikely will, if the heirs are reasonably competent.
My retirement at 56 depends on the 10-year yield! Thats how I get my monthly income!! Arrrgggghhhhhhhh!!!!!!
I thought you had a government job and thus a guaranteed pension?
Retired from US Govt this year. And pension is half of what it was pre-1980s. The rest comes from TSP/401k (hence the 10-year) and eventually Social Security.
Short-term money flows, proxy for R-gDp, and long-term money flows, proxy for inflation, have driven N-gDp, down sharply after July. That will continue for a couple of months, then a small rebound, followed by a drop beginning in January 2025. A recession is possible beginning in August.
As I said on 7/1/24: “If my #s are right, that is the distributed lag effect of money flows are mathematical constants, then N-gDp plunges after this month – July”
I listened to the charts and rebalanced my portfolio into bonds, gold, staples, and utilities this week.
Thanks for helping me be aware of how quickly the bond market is moving Mish.
I rebalanced the end of second quarter as I had gotten too stock heavy.
I stayed in short term bonds as rates were rising, now it’s time to go longer.
And like the last 40 years of my life, each and every week, I have more nominal wealth than the week before. None of these ups and downs matter.
So no Real wealth?
We are all being bled by higher than reported inflation and taxes. Currency devaluation equals massive inflation.
4.3 U3 was likely the most important item as the big meme has been the Sahm Rule.
We have been long duration (30 Year Futures, and more recently buying the 2 year as well) for a long time and selling calls against it to improve basis
Technically, this is a big breakout confirmation of the secondary downtrend line starting about 2 years ago
We got out of almost all of it and will re-enter if it comes back to the breakout area. Hopefully we dont get Nov Dec type runaway action (18.5 points in 30 Year futures in like 8 weeks)
I have been saying for a long time we would get a 2008 type situation with the economy dropping into the election as it did to Bush in 2008
Remains to be seen if we get any kind of financial crisis or this is just run of the mill recession
The amount of government spending keeps GDP looking good, even though in the long run it weakens the economy
Cant think of a black swan right now, but then that is the nature of Black Swans, maybe the wars all over the place
CRE likely isnt it as that is a very slow burn problem.
What happened in Japan was way more impotant than a 4.3% unemployment print. These huge drops in yields will do a lot of heavy lifting for the Fed. If the next CPI report has a flat or “higher than expected” print, especially in core services, then this week’s bond action may. give the Fed cover to delay their first rate cut until November (after the election). This week is a godsend for the Fed, allowing for a sigh of relief in not having to make a cut that could be viewed as “politically motivated”.
Was wondering what was happening as well. Next question, will rates continue to go down?
Thanks for the analysis!
The Fed is in a tough spot. It will cut the short end for sure.
It can also play games with an “operation twist” move (selling one part of the curve and buying another), but all of this kind of stuff generally failed historically (did little to nothing) or eventually backfired.
Barring Twist moves or QE, the long end will do what it wants. I suggest drop fast, but the historic lows are in. Not headed back to zero or near zero on the long end.
The Long bond yield went under 1 percent. I doubt it can even get to 2.5% this time.
Iran and her proxies might attack Israel any day now. Hezbollah will strike deep in Israel. The Hooties will get worse. The IDF will fight back. Iran oil terminals have target on their back. Inflation might popup. Exogenous causes might prevent rates cut in Sept. JP might stay put.
I bet the MIC is wishing they could just cut to the chase and declare that Iran has weapons of mass destruction. Nah, people are slightly more sophisticated now…oh wait.
2.5% is a nice total return …
The media told investors that the Fed will cut rates in Sept. They park their money in the 6M, 1Y, 2Y and the 5Y sending them down. The middle pulled the long duration down. The 10Y – 2Y = 3.792 – 3.874 = (-)0.082 % ==> recession ??
There is no net change in “parking” money. It is impossible for that to happen.
The yield curve was repriced with the 2-year moving the most percentage points. There was no net move into or out of bonds.
I do not subscribe to the theory that the recession trigger is the 2-year yield inversion ended. In fact, I proved that.
We had two recessions where the yield curve was inverted the whole time.
The German yield curve is caving in pulling the US middle down. The lowest rate in the US and Germany is 5Y. The middle is dragging the long duration down in both countries. The front end is anchored to FFR. It can hardly move, but when the front end (1M, 2M) expired investor park in 1Y, 2Y…not in bonds. The net is the same.
When the front end TBills expire they are replaced with an even larger stack of newly issued T-Bills. Money doesn’t park in new places you have to look at the stock of all bills and bonds. Investors can set rates but they do not set supply.
In a free market this would happen. What if this market was not free and manipulated. Say the manipulator has mutiple acounts, one specifically for stocks and one for bonds, yet the account was one. Where they can buy and sell from mutiple brokers?
You think Mish the New York Stock exchange is not a manipulated item? or do you still believe in a free market?
Or the Black stock market or bond market. Where bonds and stocks exist in the dark web,then brough into the market during business hours.
It’s been weakening for months, it accelerated in the last few weeks, it became impossible to ignore on Friday.
Correct
Its easier than that…a bunch of stocks were sold so most of the proceeds went into bonds…..
It is 100% guaranteed mathematically impossible for money from bonds to go into stocks or vice versa.
For every seller of a stock there is a buyer. For every buyer of a bond there is a seller.
Money cannot and will not ever move from stocks to bonds or vice versa. What happened is stocks were repriced and bonds were repriced.
The yield curve was repriced with the 2-year moving the most percentage points. There was no net move into or out of bonds.
An individual can change an allocation, but there will be an equal and opposite reaction somewhere else.
Buyers = Sellers
There is never an aggregate change
However, the individual checking accounts of the tens of millions of people doing the trading are going up or down, and the current market prices are set by those tens of millions of trades.
Correct.
But Mish’s assertion remains correct.