I understand this won’t help your trading in the immediate term, but it could help with trigger points to identify if we are going into a sustained higher volatility environment.
1 – We can search on Bloomberg for the keyword ‘recession’ and see this has spiked to the highest level since 2011.
2 – We have seen searches of ‘recession’ on Google Trends increase to GFC levels. In this chart, Nordea Research shows prior periods where the US 2s10s Treasury curve inverted.
We can look at market pricing, to see the perception of how close are we to a US recession. Here, we can extrapolate that if we see one in the US, then we are likely to see far tougher times in other countries, such as Australia.
3 – The NY Fed recession probability model (12-months out) – this currently sits at 31%, which seems low, but consider prior probability readings going into recessions (highlighted by the red shaded areas) were not much higher.
What trigger points are worth watching?
4 – The US labour market has been at full employment for some time, but should we see cracks appear it will rubbish the Fed’s belief the US economy is in a ‘mid-cycle adjustment’. Here I look at the 4-week rolling average of the weekly jobless claims (white) and overlap against a 36-month average. Historically, when we see jobless claims rise, and subsequently break the 3-year average, it tends to precede a recession (red shaded areas)
5 – Conference Board (CB) ‘jobs plentiful / jobs ‘hard to get’ ratio. This is part of the monthly CB survey, where we see respondents offering their belief in the labour market outlook and the ease of obtaining employment. Again, if the labour market turns, its often a sign business is cutting back as we head into tougher times. This indicator has seen a dip into prior recession, showing more respondents see jobs harder to come by on a relative basis. No red flag at this juncture.
6 – CB leading index – An index of 10 leading US economic indicators, which, as we can see, will decline sharply into recessions. We are not there yet, but it is turning lower and consider that we get the July US leading index update tonight at 00:00aest. So, it is worth watching.
7 – Consumer confidence (white) vs the S&P500 – It won’t shock to see consumer confidence decline into a recession, and the sharp turning points are the red flag. As we see, the index is not giving any clear signal we are headed into tougher times.
8 – The US 10-year Treasury – German 10-year bund spread. We often see the US Treasury’s outperform its German peer, resulting in the US Treasury yield advantage over bunds coming in aggressively into recessions. It has also been a reasonable predictor of how the S&P 500 may trade too. So, the fact we see this spread narrow at this juncture is something I have an eye on.
Chris Weston, Head of Research at Pepperstone.
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