The message being sent to the US Fed from the market is somewhat confusing, says Michael Hartnett, an investment strategist at Bank of America Securities. In his weekly Flow Show note, he cites several factors pointing to a recession. For first time since 1981, every US yield curve has been inverted for over six months, he says. In the past 100 years, the current 170 basis points of inversion between the 3-month and 10-year yield has been exceeded on just 125 days. Such a move suggests a recession is imminent, he says. Another signal supporting this scenario is oil prices. Oil "can't catch a bid" despite recent OPEC (Organization of the Petroleum Exporting Countries) supply cuts and a big US inventory drawdown. In addition, the latest US Institute for Supply Management (ISM) manufacturing reading of 46.3 is nearing the 45 level that in the past 70 years has always delivered a recession and lending standards to small US businesses are the tightest since 2012, and set to tighten further as growth in US money supply of -4.1% is the most negative since 1933, he says. The expected macroeconomic and market chronology of past 18 months ‒ inflation shock leading to rates shock, a bear market, a recession, Fed cuts, and then a bull market ‒ "has been interrupted," he says.
- PWC