More rate cuts incoming – Recession imminent

Recession around the corner

Hey folks. Sorry I’ve been away for awhile. I took a long hiatus from blogging after my vacation from earlier this year. My toddler just started daycare this week so I now have time to get back into writing on a regular basis. 🙂

The stock markets in Canada and the US have both gone up by about 10% since two quarters ago. But that’s a bit strange to me because the fundamentals have gotten worse. Unemployment is higher, insolvencies are up, and GDP per capita continues to fall. And we recently witnessed 2 major recessionary signals in the US get triggered: The Sahm rule, and the yield curve inversion reversed. Both have been reliable indicators for recessions in the past.

What is the Sahm Rule

Named after Claudia Sahm, who used to work for the Federal Reserve, the Sahm Rule is when the 3-month moving average of the national unemployment rate rises by 0.50% or more relative to its low during the previous 12 months.

We have recently crossed the 0.50 mark on the chart and moving higher. From the graph below you can see that historically this had lead to economic recession, indicated by the gray columns.

What about the treasury spread

Here we can see the difference between the yield on the 10 and 2 year US treasury notes.

Notice how it’s not when the chart goes negative that leads to a recession. But rather recessions typically occur when the yield uninverts again and comes back up to positive territory. And we have just witnessed that as well.

The Federal Reserve will cut interest rates tomorrow. Mostly likely it will be 0.50% with a small chance of being 0.25%. But this is only the start of a large rate cutting cycle that will continue into next year as the global economy struggles.

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Random Useless Fact:

Our limitations can often in our own minds.