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Fed's low confidence signals recession

It's not unusual for the Societe Generale strategists to make bear calls, but this year the Fed might be signalling the same
Fed's low confidence signals recession

When Jeremy Corbyn became leader of the Labour party, nobody was describing him as a moderate, least of all investment bankers. Yet this was the adjective used by speakers at Societe Generale’s annual global strategy conference, to describe Labour’s fiscal plans in comparison with what may be needed in the next global recession. Regardless of whether Mr Corbyn can force a general election, on the back of Teresa May’s failure to get her Brexit deal through Parliament this week, the dial is moving and tools governments use to address secular stagnation in global economies will have serious consequences for investors.  

The SG conference has been described as “Woodstock for Bears” and its host and chief economist, Albert Edwards, has clung onto his perma-bear views throughout a 10-year bull market. That said, when Mr Edwards has been right in the past things have been very ugly and in 2019 he is far from alone in spying indicators for economic contraction and potential downturns in stock markets. Much attention has been focused on the United States Federal Reserve’s programme of monetary tightening and the softening of rhetoric from Fed chairman Jerome Powell has been taken as a sign the world’s most influential central bank isn’t confident about growth.

The inverse yield curve for US Treasuries is historically a sign of impending recession and Professor Riccardo Rebonato of the EDHEC Risk Institute argues that, if anything, the market appears to have been a bit too complacent about the risk of recession. The Professor’s Bond Risk Monitor showed very similar risk compensations for two- and five-year yields, which would indicate that US Treasury investors weren’t pricing in rate cuts as quickly as the Federal Reserve expects to have to make them. The Fed’s dot plot – which shows the median level the Fed Funds Committee expects interest rates to be at – indicates tightening will need to end and rates be cut by around 2020-21.

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