Last week's inversion of the 3M-10Y Treasury yield curve has generated a lot of excitement (Bloomberg: USYC3M10 Index) because, historically, such “curve inversions” have tended to precede major economic slowdowns by about a year ...
Attention cependant! What could be a short term signal for shorting the SPX, it is not necessarily the cause of a downturn of the economy or of the markets. Implying that the inversion of the curve IS the cause of a recession would be a misreading running the risk of creating a detrimental self-fulfilling prophecy. In the meanwhile though, we keep both our shorts and our eyes wide open. The news is that from now on the short will be managed more actively and eyes will be even more active as a curve inversion of this kind happened on average one year before the US entered a recession. In the year 2000, the inversion of the curve coincided exactly with the peak of the S&P 500 while in the case of the GFC, the curve inverted on June 2006 while the S&P rallied for another five quarters before loosing steam on a definitive base.
This message of pessimism about growth though ignores that a solid labor market continues to underpin consumption, the most important driver of U.S. economic activity. It is too early for crying wolf and run because a recession is coming. At the same time, this inversion is definitively a wake up call for policy-makers for being even more motivated to press forward with pro-growth measures. I'm counting the seconds for Mr. Trump announcing an infrastructural plan and sail trough reelection on 2020 but, this is fantapolitics for now.
Lastly, some alternative historical perspective: President Trump decided to sign a Sovereign decree for the Golan Heights. Major developments involving Israel always happened before a recession. Again, I dont know is this is just coincidental or there is a causal connection with a recession coming " posterity will judge".