Yield curve suggests that US Recession is near: Trading Setups
Stock-Markets / Financial Markets 2019 Jan 11, 2019 - 10:26 AM GMTBy: FXCOT
Investors think recession risk is quite high. This, though, raises another question: Since investors have access to the same news and data as the Fed, how can they know the economy better than the Fed? Economist Jesse Edgerton of J.P. Morgan has found that economic data has a better record of predicting recession than the yield curve and right now, the data sees lower odds than the yield curve. Short-term interest rates are set by the Federal Reserve, and long-term rates by bond market investors. The curve has been flattening for the past two years as the Fed has slowly raised short-term rates in hopes of a “soft landing,” a slowing in growth that keeps both unemployment and inflation low and stable. But in recent months the flattening has been driven by falling bond yields. The usual interpretation: Investors in their collective wisdom think the Fed is overdoing it with rate increases and could shove the economy into recession, in which case short-term rates will be lower in a few years than they are now.
Investors in their collective wisdom think the Fed is overdoing it with rate increases and could shove the economy into recession, in which case short-term rates will be lower in a few years than they are now.
The yield curve can act as self fullfilling prophecy. When the long end of the curve starts to fall, it can trigger a herd mentality where more money will start to feed into the safety of long term treasuries. So in a way the inverting of the curve will not only predict the recession but causes it.
We attach some major charts and the market trading setups Dollar Index
Dollar Index has fallen below our key support level at 95.5. No bounce of these levels suggests there could be some more bearish pressure. Unless the FED is outright bullish when they talk later today, the narrative may not change. Risk aversion will be another trigger for some more dollar rally. We continue to suggest to clients to not trade manually or based on charts and indicators. Our trading system is pure price action based system which trades on BREAKOUT and Volatility and SCALPING. These are systems used in professional bank desks on super select prop desks. It takes out imagination fueled trades based on charts. If you would like to connect your mt4 to our system, please contact us
The stock indices are returning to the previous broken support level at 2600 to 2625. We expect equity markets to face fierce resistance and some short term pull back is expected. The 2625 level will decide the ultimate course of S&P if the bull market can pull back to 2800 or not.
The fear index, vix, is pointing to some short term bounce in volatility. The index has been continuously above 20 levels and has made trading far ore costly.
The weekly charts of ifutures show overhead resistance at 2630/25. We see those levels in play. The resolution of China trade talks and potential NK meeting will take it there.
The 30 min of the continuous futures, suggests that prices are not backing away yet of the strong overhead resistance. There could be further strength left in the rally before exhaustion. Bear market rallies can be sharp and take out almost all the bears. Be careful if you are a early shorter.
GOLD is near breakout level. 1298 level is the barrier and once it clears, we could push to 1325. Watch out for dovish fed commentary today.
Oil is nearing strong resistance at 54. A breakout above 54 could see some string upside move to 64. Only dollar strength can put a lid on oil.
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