There is a 35 percent probability of a US recession, according to an economist.
Concerns about the United States entering a recessionary period contributed to a decline in 10-year Treasury yields on Aug. 5, with other major assets also suffering losses.
The 10-year
Treasury hit a low of 3.65 percent on Monday, breaking through the low of 3.727 percent hit in July last year. The security has been on a downtrend after hitting its peak late April.
The 10-year Treasury is the most widely
tracked government debt instrument, with its yields usually used as a benchmark for interest rates on debts such as corporate loans and mortgages. Investors often use the 10-year Treasury to
compare the risks and rewards of other financial instruments. When these Treasurys decline, it typically suggests that investors are cautious about the economic situation.
The slump over the past few days was triggered after
data from the U.S. Bureau of Labor Statistics (BLS) released Friday showed that the unemployment rate jumped from 4.1 percent in
June to 4.3 percent in July. There were 7.2 million unemployed individuals last month, which is 1.3 million more than July last year.
The “Sahm Rule”
indicator, which has reliably predicted recession over the past decades, registered a value of 0.53 for July. When the indicator rises 0.5 percent or more, it signals a recession.
The dismal employment data has stoked fears that the United States could soon enter a period of recession, leading to investors pulling out money from assets they deem risky.
This sentiment has triggered a global market meltdown, with major assets tumbling. As of 9:30 a.m. EST on Monday, Asian markets in Japan, China, and India were in the red. Commodities like
gold and crude
oil were also trending down.
In the United States, both the 10-year and the two-year
Treasurys had fallen by around 3 percent by this time. The S&P 500 Index
opened down by more than 3 percent.
“When it comes to U.S. data, the focus is now on the job market, so pay particular attention to initial jobless claims this Thursday (not generally market moving data), as well as the State Employment data (providing detailed state-level employment data, something markets rarely pay much attention to), to be released on Aug. 16,” Alex Kruger, a partner at Asgard Markets,
said in an Aug. 5 post on X.
Recession Risks, Interest Rates
All eyes are now on the U.S. Federal Reserve, with investors looking at whether the agency would cut interest rates, and, if so, by how much. Rates are currently sitting in a range of 5.25–5.5 percent, a level maintained since July last year.
The vast majority of interest rate traders are
expecting the Fed to cut interest rates at the September meeting of the Federal Open Market Committee. The Fed “may be bullied by markets into a 50 bps [basis points] September cut,” economist Mohamed A. El-Erian
said in an Aug. 5 X post.
“Such an outcome would constitute a notable change in the Fed’s policy narrative, which would also need to be accompanied by significant revisions to their economic projections.”
The Fed has consistently said that it does not intend to bring down interest rates unless inflation comes down to its target of 2 percent. Inflation has been hovering at or above 3 percent since June last year.
El-Erian
calculates a 35 percent probability of a U.S. recession. In late June, Treasury Secretary Janet Yellen had
claimed that the Fed’s high interest-rate policy would cool down inflation without triggering a recession.
But with the latest dismal unemployment data, banking and financial services firm ING believes the Fed “won’t stand back from easing” interest rates, according to an Aug. 2
report.
ING is sticking with its prediction of the Fed implementing three, 25 basis-point cuts this year, for a total cut of 75 points. However, “risks do increasingly appear to be skewed to more aggressive action, especially in early 2025 we suspect,” it said.
“The Fed remain wary about inflation, but this week’s employment cost index and unit labor cost data should really have boosted their confidence that inflation is on the path to 2 percent. Their focus needs to be the state of the jobs market.”
