US Recession Watch Overview:
- Ongoing stimulus efforts by the Federal Reserve to head off the economic fallout from the coronavirus pandemic have implicitly tamped down the US Treasury yield curve.
- There remains a significant expectations gap what the yield curve pricing for a recession and other measures of near-term growth; the Q2’20 Atlanta Fed GDPNow reading is, simply put, awful.
- Traders continue to anticipate no change in interest rates by the Federal Reserve through January 2021 – that means no move into negative interest rate territory.
US Q2’20 GDP Downturn Will Be Severe…
The US economy is in rough shape. Thanks to how GDP is calculated (the first month of the quarter has five times the weight as the third month), the economic brunt of the coronavirus pandemic, levied significantly in April and then trailing off in May, will show up in the form of a significantly depressed growth reading.
The Atlanta Fed GDPNow growth tracker for Q2’20 US GDP has flirted with a contraction in the neighborhood of -50% (more on that below). The nine-week total for US initial jobless claims is now a staggering 38.6 million.
And yet, despite the US Treasury yield curve signalling less than a 20% chance of a recession within the next 12-months, it’s obvious that fears of a major economic contraction are well-founded. [We’ll explore why the US Treasury yield curve is no longer a viable indicator in this regard towards the end of this note.]
…but US Q3’20 GDP May Offer ‘Green Shoots’?
Even as the US economy deals with the worst rate of contraction not just since The Great Recession, but the fastest contraction in the post-World War II era – yes, going back to The Great Depression – there are some signs that things may not