After the Dow shed almost 1,000 points on Monday, stock market futures point to a slight recovery on Wall Street this morning.
Tuesday’s bounce, however, is tainted by the Treasury’s recession indicator which plunged to a level not seen since before the 2008 financial crisis. As the trade war between China and the US escalates, the recession alarm is screaming.
The Dow Jones Industrial Average shed 890 points on Monday, falling 3 percent in the biggest drop of the year so far. The slump was triggered after China “weaponized” the yuan by letting it fall beyond the key $7 level, in what was perceived as retaliation to Trump’s trade threats.
Dow futures point to a rebound in the US stock market on Tuesday with a 212 point surge in pre-market trading. US stock market futures followed the European markets higher after China took steps to limit the yuan’s slide against the dollar.
Elsewhere, Asian markets ended in the red with both the Shanghai Composite and Japan’s Nikkei index limping into negative territory.
Monday’s plunge triggered the Treasury’s favorite recession indicator, sending it to crisis levels last seen in 2007, just months before the global financial recession. We are, of course, talking about the inverted yield curve.
An inverted yield curve occurs when long-term Treasury bonds return less than short-term bonds. On Monday, the three-month US Treasury bill yielded 32 basis points more than the ten-year bill – the most significant inversion since 2007.
The indicator has accurately predicted every recession for the past 50 years. It’s worth pointing out, the trigger is not immediate and can take months to play out. The yield curve first inverted in March this year and has flirted with the 2007 low ever since.
In another ominous sign for the stock market, Goldman Sachs said it no longer expects Trump to sign a trade deal before the 2020 election. Chief economist Jan Hatzius wrote in a letter to investors:
“News since President Trump’s tariff announcement last Thursday indicates that U.S. and Chinese policymakers are taking a harder line, and we no longer expect a trade deal before the 2020 election.”
A trade deal was widely expected to help ease stock market tensions, but that catalyst now seems further away than ever.
Instead, traders are looking to the Federal Reserve for new stimulus. With the recession alarm triggered again, investors are beginning to price in the likelihood of another interest rate cut in September.