An Inverted Yield Curve Returns: Can’t Trump Boost the US Economy?

TradingKey — Unlike the scenario of a soft landing seen last year, the recent spate of weak economic data has led Wall Street to begin discussing a potential economic recession and the Federal Reserve's possible recessionary rate cuts.

Consequently, US stocks have declined, while US Treasury bonds have risen sharply, and the inversion of the US Treasury bond yield curve has once again become a topic of concern.

Following last week's data from the University of Michigan's Consumer Sentiment Index, the Services PMI Index, and home sales data—which indicated that economic growth might be deteriorating—the Conference Board's Consumer Confidence Index, released on Tuesday (the 25th), provided further evidence.

Data showed that the consumer confidence index in February dropped from 105.3 to 98.3, far below the market expectation of 103. This marks the third consecutive month of decline, with a drop of 7 points, the largest since August 2021.

As a result, US stocks and US Treasury bond yields plummeted. The S&P 500 Index and the Nasdaq Composite Index have fallen for four consecutive days, dropping by 0.47% and 1.35%, respectively. The yield on the 10-year US Treasury bond fell by about 10 basis points to 4.2926%, while the yield on the 2-year US Treasury bond dropped by more than 7 basis points to 4.0921%.

In just over a month, safe-haven funds have flowed into US Treasury bonds, and the yield on the 10-year US Treasury bond has dropped by about 50 basis points from its peak of 4.8% reached in mid-January—quite a rare occurrence.

The yield on the 10-year US Treasury bond is now lower than that on the 3-month US Treasury bond, which is the yield curve that the Fed has been paying close attention to recently.

The inversion of the yield curve is generally regarded as a precursor to an economic recession. The last time this curve inverted was in mid-December last year. However, the long-term inversion since the end of 2022 has not yet led to an actual recession.

According to CME, traders are currently betting that the Fed will cut interest rates twice this year. The probability of the first rate cut in June is 52.5%, and the probability of another rate cut in October is 35.8%.

The Recession May Have Begun

Bloomberg columnist John Authers noted that this is a renewed growth scare, partly because job cuts could slow the economy in the near term. The results of business surveys have also been consistently pessimistic. Although Trump’s return to office has brought more excitement and action than during his first term, consumers seem to be more skeptical.

Strategists at Brown Brothers Harriman warned that red flags are emerging for the US economy. Another month or two of poor economic data could deal a blow to the US exceptionalism narrative.

Bloomberg strategist Mark Cudmore pointed out that the narrative has shifted from "the new US administration isn’t yet delivering on our pro-growth expectations" to "US policies may be starting to cause real economic damage."

Cudmore noted that this is why US 10-year yields are at their lowest level in more than two months, and they may decline significantly in the coming weeks.