Capital markets perspective: Two birthdays

Capital markets perspective: Two birthdays


It’s a big week for birthdays.

The United States of America turns 248 years old on Thursday, but I also want to acknowledge another birthday: The inversion of the yield curve turns two years old next Monday

For those who may not be familiar, the phrase “inverted yield curve” simply means that it’s more expensive for the US government to borrow money in the short-term than it is to borrow money for the long-term. Ordinarily, if you borrow money from someone and intend to pay it back over ten years, you expect to pay a slightly higher interest rate than if you only wanted to borrow for, say, two years. 

But occasionally, that relationship flips on its head – a phenomenon known to economists and rates traders as “an inverted yield curve.” Based on previous experience, when the yield curve stands on its head, it often portends trouble ahead for the economy. There have been approximately 14 yield curve inversions since the mid-1960s (or 15 if you count a very brief one- or two-day foray into upside-down territory in April, 2022). That aside, you can credibly claim that just over half of those inversions have been followed by an economic recession within a year or so. While that’s a lot of false positives for one of the most durable and intuitively pleasing myths in investment lore, the cliché has endured for a reason: Inverted yield curves often (eventually) correspond to recessions.

A yield curve inversion that reaches its second birthday is pretty rare. Depending on how you measure the tumultuous period between 1978 and 1982, it hasn’t happened in at least 50 years. But something about this cycle has been different – we’re now two years into a yield curve inversion that has neither healed itself nor triggered a recession. 

On reflection, it makes sense that this particular inversion of the curve is taking longer to render its verdict on the economy than normal, especially when you consider the key role that the Federal Reserve (the Fed) usually plays in forcing a flip.

Remember that it took longer for the Fed to begin raising rates in response to accelerating inflation, but it has also has taken a lot longer than it normally would for the Fed to become convinced that inflation is going away quietly enough for them to gain the confidence necessary to cut rates. That, plus the truly exceptional nature of just about everything associated with the post-pandemic economy makes the lasting nature of this particular yield curve at least somewhat more understandable.

Besides, an upside-down US Treasury curve is just one more in a growing line of classic recession signals that has either backtracked or stalled out. The list of unrequited recession warnings issued so far this cycle includes deeply negative PMI surveys, collapsing business confidence (at least for small business owners,) a false positive from a Conference Board recession model based on its own well-respected Index of Leading Economic Indicators and, increasingly, weakening employment trends across a broad range of state and local economies.

Our yield curve research suggests that it’s really when the curve un-inverts that the economy has historically run into trouble. So again, we can probably attribute the once-in-a-generation experience of the pandemic for short-circuiting these and other economic signals, while still recognizing that the economy may not be quite out from underneath the yield curve’s dismal prophecy just yet. 

In the meantime, we continue to get a litany of mixed signals from the economy itself. Last week’s housing data did little to soothe the previous week’s disappointing numbers, with new home sales dropping to their lowest level since last winter and inventories of unsold homes rising to their highest levels in a year.1 That’s probably not surprising, given the fact that the relentless run-up in home prices continued in May and the previous week’s NAHB builder survey was pretty downbeat.2 It will be hard to argue that the US economy is reaccelerating unless the housing market returns to healthy form.

Elsewhere, trends in manufacturing, at least as seen through the lens of this month’s regional Fed manufacturing reports, ranged from upbeat (Philadelphia) to expectedly weak (Dallas) to poor (Richmond and Kansas City.)3,4,5,6 Even in Philadelphia, where the headline number was fairly positive, there was clear evidence that the Fed’s rate-raising campaign is finally leaving its mark: 44% of the region’s manufacturers say access to capital is now a constraint on business (including nearly 15% who say that impact is “significant”). The manufacturing sector is performing a little better than it was a year ago; But like housing, a robust recovery in the productive economy would go a long way toward creating confidence in the durability of the current expansion.

The consumer, too, isn’t exactly sure what to make of all these mixed messages. Last week’s consumer confidence surveys were weak, with the University of Michigan reporting that consumers are still struggling with high nominal prices even as inflation decelerates. The Conference Board also warned that a weaker labor market could also affect consumers. Meanwhile, Friday’s income and outlays report came in neutral as expected, with the caveat that incomes expanded faster than spending – further evidence that consumers are suddenly spending less

What to watch this week

Many of us in the US will try to stretch Thursday’s Independence Day holiday into a four-day weekend, but staffers at the Bureau of Labor Statistics probably won’t have that luxury. That’s because it’s payrolls week: That three- or four-day stretch each month when economists and investors hold a bright light up to the labor market and try to assess its health.  

Weekly jobless claims have ticked higher, and it seems as if the momentum might really stick this time. But new claim levels are still comfortably below where they likely would be if the economy were really teetering, and the number of consumers who consider jobs to be “plentiful” improved with last week’s Conference Board release. Still, the idea that incremental worsening in the availability of jobs could seriously weaken confidence in the economy as a whole re-entered the conversation for the first time in recent memory, and the job market is clearly having more trouble digesting the newly unemployed than it has in a long time. 

Another recent feature of the labor market is a dwindling number of companies that are willing to hire new employees. That has shown up most visibly in the declining number of job openings detailed in the job openings, leavings, and turnover survey (JOLTS). But the trend is represented even more acutely in second-order data like continuing claims and, more simply, the monthly accounting of layoff announcements cataloged by outplacement firm Challenger Gray and Christmas, whose data has recently shown that businesses plan to hire fewer workers this year than at any point in the last nine years.7 For those interested, both JOLTS and Challenger layoffs will be updated before Friday’s payroll release.

Beyond jobs, we’ll get fresh ISM and PMI data this week, with manufacturing sector results due Monday and services due on Wednesday. As longtime readers know, we’ve seen a hand-off from manufacturing to services and back again as the post-pandemic expansion rolls on: For the better part of a year and a half, the PMI/ISM surveys were suggesting that manufacturing was in a slump, while activity in the services continued to expand. More recently, however, manufacturing activity has tried to rebound while services have shown signs of slipping. 

Finally, before the July 4th break, we’ll get the official minutes from the Federal Reserve’s June 11th – 12th FOMC meeting. Because that meeting also provided the periodic update of the Staff Economic Projections much of the mystery has likely been removed.

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1 United States Census Bureau, “Monthly residential sales, May 2024,” June 2024

2 FHA, “House Price Index (HPI) Monthly Report,” June 2024

3 Federal Reserve Bank of Philadelphia, “June 2024 Nonmanufacturing Business Outlook Survey,” June 2024

4 Federal Reserve Bank of Dallas, “Texas Manufacturing Outlook Survey,” June 2024

5 Federal Reserve Bank of Richmond,, June 2024

6 Federal Reserve Bank of Kansas City, “Tenth District Manufacturing Activity Fell Moderately in June,” June 2024

7 Challenger Gray, “Job Cuts Announced by US-Based Companies Flat in May 2024; Hiring Falls to Lowest YTD Since 2014,” June 2024 


Tom Nun, CFA


Tom Nun, CFA, Portfolio Strategist at Empower, works alongside teams overseeing portfolio construction, advice solutions, portfolio management, and investment products and consulting.

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