Recessionary Drivers: High Prices, Rising Rates, War, and Yield Curve Inversion
You May Not Be Interested in Inverted Yield Curves, But They Are Interested in You
Not all recessions have inverted yield curves, But almost all inverted yield curves coincide with recessions. An inverted yield curve is indicative/coincident (neither causative nor reverse-causative) of recession fears. You just have to figure out what caused the curve to invert. That is what this assessment aims to find out.
If history is any guide, the global economy could be sleep walking into a recession.- Mitsubishi Financial Group (MUFG) March 30th, 2022
We are currently in the teeth of powerful forces chewing up the current economic outlook. Soaring inflation from commodities, rising interest rates, high ongoing geopolitical risks, and an inverted yield curve are all “conspiring” to undermine the global post-pandemic recovery.
These four factors rarely coincide, but are not entirely unprecedented in recent history. Since the 1970s began, there have only been four prior times when these hit almost simultaneously according to a report by MUFG. And each time they ended in recession:
On only four occasions since the 1970s have soaring commodity prices, rising interest rates, an inverted yield curve and geopolitical risks simultaneously blended together. In each of these occasions the global economy witnessed a recession within the subsequent 11 months, on average.
HISTORICAL EPISODES OF HIGHER COMMODITIES, HIGHER RATES, INVERTED YIELDS AND GEOPOLITICS
Inflation is above 7% in much of the western world, Russia is occupying the Ukraine, Central Banks are hawkish, and the yield curve is telegraphing an increasingly sticky inversion spreading all along the term structure. Lets go through what MUFG has to say about 3 of the 4 factors in short order.
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