The Federal Reserve’s Favourite Recession Indicator Is Flashing a Danger Sign Again

• An ominous measure that the Federal Reserve considers a near surefire recession signal again has reared its head in the bond market. The 10-year Treasury yield passed below that of the 3-month note in trading Wednesday. This is known as an “inverted yield curve.”
• At the end of January, when the 10-year yield was about 0.31 percentage points clear of the 3-month, the probability was just 23.0%. However, that is almost certain to change as the relationship has shifted dramatically in February. The reason the move is considered a recession indicator is the expectation that the Fed will cut short-term rates in response to an economic retreat in the future.
• Of note, yield curve inversions have had a strong but not perfect forecasting history. In fact, the previous inversion happened in October 2022, and there’s still been no recession 2½ years later. Therefore, while there’s no certainty that growth will turn negative this time around, investors worry that expected growth from an ambitious agenda under President Donald Trump may not happen due to his tariff-focused trade agenda.
• Recent sentiment surveys have reflected consumer and investor angst over prospects that growth could slow under his leadership with inflation perking up just as it appeared to be easing.
• In the University of Michigan’s monthly survey, respondents put their longer-term view on inflation, over the next five years, at its highest level since 1995. On Tuesday, the Conference Board reported that its forward-looking expectations index had sunk back down to levels consistent with recession in February.
• Still, most of the “hard” economic data such as consumer and labour market indicators have held positive even in the face of downbeat sentiment.

(Source: CNBC)