Stocks were hitting news highs after U.S. President Donald Trump and Chinese President Xi Jinping agreed to a trade cease-fire. Unfortunately, the agreement might have come too late to keep the U.S. from slipping into recession.
Yes, the Dow Jones Industrial Average just traded at a new high. So did the S&P 500. But there were other data points Monday that point in the opposite direction. The ISM manufacturing index fell to 51.7 in June. While that wasn’t as low as feared or below the 50-level that would indicate slowing industrial activity, it was still the weakest reading since 2016. The forward-looking new-orders component, however, fell to 50.
“Overall, this report is probably not enough to move the needle much in either direction on Fed rate cuts,” according to a report from research firm Capital Economics. “But with global demand set to remain subdued, and the tariff truce agreed at the G20 summit likely to prove temporary, we expect U.S. manufacturing activity to remain weak in the second half of this year.”
Weak, obviously, is different than slowing. Yet any time the economy slows, there is a risk of recession, which is one reason the difference between the yields on the 10-year Treasury and the three-month bill has turned negative. That is known as a yield-curve inversion, and research has shown that if it lasts long enough, it is a reliable predictor of a recession. The Cleveland Fed recession model, which is based on that yield curve, is predicting a 37.8% chance of a slowdown in one year.
A similar model from the New York Fed only shows a 29.6% chance, but that’s not necessarily good news. Since 1960, any reading over 30% has led to a recession, according to Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management. “The upshot is the New York Fed Probability of Recession in 12 Months Ahead, a model that uses leading indicators and economic variables that tend to move before changes in the economy, has neared the 30% threshold that has reliably predicted past economic downturns,” she writes. “With the deterioration in the June data, we think the model’s next report will show the economy continued to weaken.”
Read more: Don’t Get Too Excited About This Trade War Truce
The market doesn’t seem too sure of itself, either. The major indexes were up more than 1% in early trading, but despite hitting new highs, the Dow and the S&P 500 gave back some of those gains.
Let’s just say that kind of weakness after such a strong opening isn’t the type of trading that builds confidence in further gains.
Write to Ben Levisohn at Ben.Levisohn@barrons.com
https://www.barrons.com/articles/the-dow-jones-industrial-average-just-hit-a-new-high-its-time-to-talk-about-a-recession-51562007713
2019-07-02 01:40:00Z
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