So About That Recession
As expected, the 10-year yield has backed up to above its level at the March FOMC, indicating that the recession scare is over. Stocks had a 20%-plus bull market in Q1 2019, indicating the same thing. Stocks and bonds were out of whack at year end, with stocks predicting recession when bonds did not – then in March, bonds were predicting it when stocks were not. Now neither is, with long-term yields having backed up more than 20 bp and most yield curves un-inverting. The fundamentals that set up recession risk in Q4 2018 – the oil price and inflation expectations collapse, the credit spread and real yield blow-out, the risk that China was walking into a disorderly slowdown by not negotiating with Trump, and a rogue Fed chair with a balance sheet on “automatic pilot” – are all fixed. Absent some notion of an irreversible “tipping point” or “stall speed,” this recession scare should serve as a mid-cycle refresh like the 2015-16 scare did. Both stocks and bond yields should work higher.