Morning Notes — Curve Clarity and Near-Term Outlook

We’ve pushed back on the recession signal quality of Tuesday’s curve inversion, citing the steep upward sloping real yield curve as a more accurate measure year-forward growth expectations.  Setting aside arguable QE distortions, a regression of a normal single-session 2/10 nominal curve inversion with a recession 12-18 month forward shows no meaningful statistical significance.  The curve inversion with predictive powers is the monthly close (30-day window) of the 2/10 nominal curve.  The correlation between a month-close curve inversion and a recession ~12-18 months forward is strongest late in an economic cycle and equities tend to peak one-to-two quarters before you realize we’re in a recession.  The month-close curve hasn’t inverted, so the clock hasn’t even started yet. Once it does, we should expect an equity market peak within a year. And if it happens, we’ll be discussing defensive positions in preparation for recession dynamics.