US Economy Faces Recession Risks Amid Spending Slowdown and Bond Market Shifts

Key Points

1. Treasury investors show skepticism about a soft landing for the US economy, raising concerns of a looming recession.

2. A significant sales drop among upper-middle-class retailers, including Apple and Nordstrom, hints at a broader economic slowdown.

The US economy is currently navigating turbulent waters with increasing signs of an impending recession. Treasury investors have become increasingly skeptical about the Federal Reserve's ability to achieve a soft landing for the economy. This skepticism is rooted in concerns about inflation and a growing budget deficit.

The bond market reflects this sentiment through the term premium, a measure indicating the extra yield investors require for longer-term debt as a hedge against unforeseen risks like inflation and supply-demand shocks.

In a stark reversal from earlier trends, the term premium in the bond market has dropped below zero. This indicates a shift in investor expectations towards a potential 2024 recession, prompting the Federal Reserve to cut interest rates. This downturn in the term premium, especially evident in 10-year notes, contrasts sharply with the high yields seen earlier in the year.

Meanwhile, consumer behavior is also signaling economic troubles. Retailers catering to the upper middle class, such as Apple and Nordstrom, have experienced their most significant sales drop in two years, a worrying trend given the reliance of the economy on consumer spending.

The upper middle class, previously buoying the economy with robust spending despite soaring inflation and high-interest rates, is now exhibiting frugality. This spending pullback is particularly evident in reduced forecasts by major retailers like Best Buy and Lowe's, and the seventh-straight drop in comparable sales at Kohl’s.

References

1. https://finance.yahoo.com/news/bond-traders-boost-us-recession-211859579.html
2. https://www.afr.com/world/north-america/is-the-us-heading-for-a-recession-watch-the-rich-on-black-friday-20231122-p5elwy