Recession Fears Appear To Have Peaked

Global bond yields were plummeting a few weeks ago, with U.S. Treasuries falling sharply and other government bond markets trading further into negative territory. That trend has reversed sharply over the past two weeks, with the 10-year Treasury yield rising nearly 50 basis points.1 In retrospect, it seems clear that bond markets were forecasting too high a risk of recession.

In our view, markets, investors and policymakers may be paying too much attention to trade and manufacturing data. These areas of the economy are important, but have been providing much more negative signals than the labor market, consumer spending and the service sector, which have all been solid. We don’t think recession fears will ease significantly until and unless we see a rebound in manufacturing, but bond markets are starting to reflect a more realistic economic outcome. We think yields will continue to move erratically, but could still see some additional near-term upward pressure.

Against this backdrop, the Fed will almost certainly cut rates by an additional 25 basis points this week, but forward guidance will be critical. The Fed seems to recognize that it overstepped on rate hikes in 2018, and we think the central bank will be careful not to do the same on cuts this year. We don’t think the Fed will bow to political pressure from the White House, but will probably remain cautious and data-dependent. We wouldn’t be surprised to see Fed Chair Powell signal the probability of a wait-and-see approach, and the Fed could stand pat for a while if economic sentiment continues to improve.

Robert C. Doll, CFA, is chief equity strategist and senior portfolio manager at Nuveen.


1 Source: FactSet, Morningstar Direct and Bloomberg
2 Source: Department of Labor

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