Recession Signal Doesn't Terrify Stock Traders

Jerome Powell has added to the markets’ sinking feeling that more interest rate hikes are coming down the road.

Photo Insert: One recession signal is worth looking at—the yield on the two-year Treasury climbed above 5% but its 10-year counterpart remained largely flat for the day, just below 4%.

The Fed chairman noted the ultimate level of interest rates is likely to be higher, adding the central bank was ready to increase the pace of hikes if the data warrant doing so, Callum Keown reported for Barron’s Daily.

Powell’s comments were met with an understandable, if not severe, pullback in stocks—the S&P 500 closed 1.5% down.

February’s jobs report, due Friday, has the potential to extend those losses, while a softer print could have the opposite effect. But the moves in the bond market led to people scratching their heads.

One recession signal is worth looking at—the yield on the two-year Treasury climbed above 5% but its 10-year counterpart remained largely flat for the day, just below 4%. Thus traders don’t see the Fed pushing rates any lower to counter a potential recession than they previously thought in the longer term.

The spread between the two-year and 10-year Treasury yields closed below minus 100 basis points, or one percentage point, for the first time since September 1981.

An inverted yield curve—when long-term yields fall below short-term yields—is seen as a recession indicator. The deepest inversion in more than 40 years suggests the bond market is pretty sure one is coming.

But the economic data show very few signs of that. The unemployment rate is at its lowest level since 1969, January’s jobs report was a blowout, retail sales were strong and inflation is still hot.

Perhaps the bond market is becoming increasingly convinced the Fed’s desire to bring down inflation—through more rate hikes—will cause a recession. The stock market, which remains firmly in positive territory for the year, isn’t quite seeing things that way, Keown concluded.

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