A Fully Inverted Yield Curve, And Consequently A Recession, Are Coming To Your Doorstep Soon
Beware!
It was only few days ago that we warned you about the partially inverted yield curve. Following the FOMC decision on Wednesday, and the remarks made by Jerome Powell during the press conference that followed it, we now feel that the "partially" is likely to be on its way to "fully".
Investors have grown skittish over the possibility of an inverted yield curve, which happens when short-dated bond yields are higher than their long(er)-duration counterparts.
As a reminder, an inverted yield curve - usually measured by the 10-2 Year Spread - has been a very reliable predictor of an upcoming recession. So much so that an inverted yield curve has actually predicted the past seven recessions.
You certainly don't want to bet against such a hitting record!
Mr. Dovish Fed
Exactly as we expected, the Fed has performed a big dovish shift in its dot-plot projections. Back in December, the Fed was forecasting four more rate hikes before the end of 2020 (three in 2019, and one in 2020). Now it is forecasting only one more hike before the end of 2020 (0 in 2019, and one in 2020).
According to current plans, the Fed intends to end its balance sheet unwinding in September of this year.
By the way, the market is still more dovish than the Fed (and rightly so), expecting one rate CUT by end of 2020.
Futures traders are now pricing in a 47% chance of a rate cut by January 2020, up from a 36% chance ahead of yesterday's 2pm FOMC release.
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