NEW YORK (Reuters Breakingviews) - A U.S. recession warning from financial markets has Donald Trump’s fingerprints all over it. A key bond market metric turned negative for the first time since 2007 on Wednesday, sending stocks tumbling. Other economic indicators in the United States and abroad are deteriorating. The common thread linking these is the president’s trade war.
The U.S. economy started the year with a good head of steam. Growth hit a three-year high of 2.9% in 2018, corporate coffers were swelling from the tax cuts the president signed into law a year earlier, and unemployment stood at the lowest level in nearly a half century. Sluggish growth overseas and a negative market reaction to the Federal Reserve’s December rate hike suggested some fragility, but virtually nobody was predicting a recession before 2021.
The White House has since escalated trade tensions, with Trump twice in the past three months announcing tariff increases affecting some $500 billion of imports from China.
As a result the yield on the Treasury’s benchmark 10-year note has since early May fallen by nearly a percentage point, to 1.59% Wednesday afternoon. Earlier in the day it briefly traded below the return on the Treasury’s 2-year note, something investors haven’t seen since June 2007. That spooked equity markets, with the S&P 500 Index down nearly 3% in early afternoon trading.
Such a yield-curve inversion, as it’s called, has preceded each of the last five U.S. recessions. It also coincides with mounting signs of stress. U.S. business confidence has fallen below its long-term average this year, according to data compiled by Moody’s, and investment in non-residential structures fell over 10% in the second quarter. New data on Wednesday showed that China’s industrial production grew at the slowest rate in 17 years in July while Germany’s economic output shrank slightly in the second quarter.
Further rate cuts appear inevitable, with interest rate futures pointing to an 81% probability that the Fed will lower rates by a quarter-point in September, according to CME’s FedWatch tool. That would represent a win for Trump, who has been berating Fed Chair Jay Powell for not cutting rates quickly enough. But the collateral damage of his trade policy is a massive price to pay.
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