Is the yield curve going to be right about an impending recession?

Thoughts of the Day

What the heck is the yield curve? The US bond yield curve is a line that plots the yields (interest rates) that an investor receives for investing in the US Treasury bonds. A normal yield curve would be upward sloping, i.e. you would expect to be paid a higher interest rate for lending your money for a longer period of time. That’s typically the case. If you deposit your money in the bank for a fixed duration of 3 months, you typically get a lower interest rate than if you deposit it for 1 year. 

However, in times of high inflation… Subscribe to read the full report.

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Fun Fact

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Day Ahead

ECB Monetary Policy Meeting Accounts are expected to be released.

Canadian Labour Data for Apr (Employment Change: +17.5k expected and -2.2k previous, Unemployment Rate: 6.2% expected and 6.1% previous)

US University of Michigan Consumer Survey for May (Consumer sentiment: 77 expected and 77.2 previous)

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What Happened Yesterday

Market Movements as of New York Close 9 May 24

Fedspeak:
Daly (current voter, slight hawk):
“A softening labour market would be getting back to normal growth. The last three months have left considerable uncertainty about the next few months of inflation. Still seeing disinflation underway; no doubt things are slower now than last year.”
(Daly is still on her wait-and-see stance with regards to monetary policy. )

US Weekly Initial Jobless Claims: 231K actual vs 210K expected and 209K prev (revised from 208K). This highest print since August 2023 broke 4 consecutive weeks of downside surprises and coming on the heels of the weaker than expected Non-Farm Payrolls and Unemployment rate data last week, it may mean that the job market is indeed starting to slow. As a result, US bond yields drifted lower with the 10-year bond yield dropping 4 basis points. 

Bank of England Monetary Policy Meeting (interest rates kept unchanged at 5.25% as expected). 2 members voted for an interest rate cut of -0.25%. The central bank mentioned that it will remain data dependent in its future policy decisions. Governor Bailey said the latest figures were “encouraging” but stressed that they are not at the point to cut rates yet but a rate cut immediately before a general election wouldn’t be out of the question. The GBP fell -0.32% against the USD from 1.2486 to 1.2446 in immediate reaction.

The US stock market opened slightly higher from Wednesday. It then traded higher through the New York session. The S&P 500 finished +0.51% higher on the day (high: +0.53%, low: -0.14%), the Dow Jones rose +0.85% (high: +0.91%, low: -0.17%) while the Nasdaq increased +0.16% (high: +0.29%, low: -0.40%).

The crypto market climbed higher along with the stronger risk sentiment in the US stock market.
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Headlines & Market Impact

US weekly jobless claims highest in more than eight months as labour market eases

Notable Snippet: The number of Americans filing new claims for unemployment benefits rose last week to the highest level in more than eight months, offering more evidence that the labour market was steadily cooling.

The weekly jobless claims report from the Labor Department on Thursday, the most timely data on the economy’s health, followed news last week that the economy added the fewest jobs in six months in April, while job openings dropped to a three-year low in March.

Initial claims for state unemployment benefits increased 22,000 to a seasonally adjusted 231,000 for the week ended May 4, the highest level since the end of last August. The increase was the largest in nearly four months.

Economists polled by Reuters had forecast 215,000 claims in the latest week. Claims broke above the 194,000-225,000 range, which had prevailed since the start of the year.

Some of the rise last week was likely related to seasonal issues following the recently ended school spring breaks.

“Given that the varied timing of school spring breaks, and holidays like Easter and Passover, makes the seasonal adjustment process very complicated, we often see volatile readings in the seasonally adjusted data around this time of year,” said Daniel Silver, an economist at JPMorgan.

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China’s imports jump 8.4% in April, exceeding expectations as purchases from the U.S. grow

Notable Snippet: China’s customs agency released data Thursday that showed exports rose in-line with expectations in April, while imports surged ahead of forecasts.

Chinese imports from the U.S., European Union and Russia rose last month, despite a drop in exports to all three, according to CNBC calculations of official data.

Worldwide, China’s exports rose by 1.5% year-on-year in April in U.S. dollar terms, while imports climbed by 8.4%, the data showed.

Exports were expected to have grown by 1.5% year-on-year, and imports up by 4.8% from a year ago, according to a Reuters poll.

In March, exports and imports both fell year-on-year.

China’s exports to ASEAN rose by 8% in April from a year ago, while imports rose by 5%.

China’s exports to the EU fell by about 3.5% while imports rose by nearly 2.5%.

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OPEC switches to ‘call on OPEC+’ in global oil demand outlook, sources say

Notable Snippet: OPEC will stop publishing a calculation of the world’s demand for its own crude in its monthly oil report, two sources close to the matter said, focusing instead on forecasts for demand for oil from the wider OPEC+ group.

The change reflects what has become long-standing cooperation between the members of the Organization of the Petroleum Exporting Countries and the wider grouping on taking collective oil supply decisions.

OPEC’s Vienna secretariat has in its monthly reports published an estimate of the demand for OPEC crude, sometimes known as the ‘call on OPEC’. The number is watched by analysts and traders as an indicator of oil market strength.

But from this month OPEC will give only the estimate of demand for crude from the Declaration of Cooperation (DoC) countries, the sources said. The DoC is the formal name for OPEC+, which comprises the 12 OPEC members and 10 non-members of which Russia is the largest producer.

Demand for crude from the wider group is now more relevant, one of the sources said, because the DoC nowadays is the framework for cooperation on the oil market. Both sources declined to be identified by name.

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Sentiment

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Best,
Phan Vee Leung
CIO & Founder, TrackRecord