Bad news bonds

Howdy readers. Phil Rosen here, writing to you from Manhattan. 

As a writer, words fascinate me, especially ones I've never encountered before. You can imagine my excitement when I read last night that scientists just found an "ultramassive" black hole. 

While scientists delight in the thrill of discovery, markets are in a more sour mood. There's another bond market signal flashing and it could mean the Fed's about to step in.

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1. If a recession does indeed arrive in 2023, it will conclude an absurdly long run of expert and technical forecasts that have been predicting a downturn since early last year. 

We write a lot about bond yields flashing recession indicators, and there are a few that are closely watched and reliable signals, such as the difference between the 2 and the 10-year Treasury, which has been inverted for about a year now. 

But there are other bond market signs, too, and the recent rally in bonds at the shorter-term end of the Treasury curve may just be the indicator with the most troubling track record. 

On Wednesday, DataTrek Research pointed out that that marker moved two standard deviations higher over recent days. That's only happened on a handful of other occasions: 

• March 2020, before the pandemic-induced recession
• August 2007 and September 2008, during the Great Financial Crisis
• October 2002, the final month of the bear market during the dot-com bubble burst

In each of those cases, the Fed ultimately stepped in quickly to slash interest rates. 

This, according to DataTrek, is bad news.

"The default scenario baked into asset prices is based on the Fed pivoting – quickly – to lowering policy rates," DataTrek's Nicholas Colas said. "That can only mean a recession is close at hand, one that would reduce inflation and be steep/deep enough to force the Fed to act."

In effect, the bond market is telling us that the Fed could be on the brink of making a policy pivot as the economy falters.

The stock market would welcome lower rates, but the move by the central bank would be in service of stimulating the economy in the event of slowing growth. 

Remember, in the name of fighting inflation, the central bank has pushed interest rates to the highest they've been since 2007, and these moves have threatened to tip the US economy into a downturn. 

But the latest CPI reading put inflation at 6%, well above the Fed's 2% target — which suggests a choppy road ahead for policymakers, markets, and the economy. 

What recession indicators are you watching these days? Do you think the US will enter a downturn this year? Let us know in the comments.

In other news:

2. This portfolio manager at a $41 billion investment firm doesn't think US stocks look as attractive as their international counterparts. He's eyeing a batch of names that could cushion the impact of a recession. See the list of stocks that could resist or even outperform in a recession.

3. Homebuyers looking for a bargain should think about these 20 cities. In certain locations across the US, houses are actually cheaper than condos — so start your search with this list if you're looking to score a deal.

4. JPMorgan shared four charts that put the banking crisis into perspective. The financial turmoil has roiled investors, but it's still possible markets avoid a crash — and the downturn in tech may be nearing its end.

5. Nvidia had added $300 billion in market value this year. Shares of the tech firm are up more than 80% this year thanks to the booming AI hype. See the numbers behind Nvidia's best quarter in two decades.  

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This newsletter was curated by Phil Rosen.