The yield curve continues to flatten at an alarming rate. The spread between the two years and the 30-year bond is the lowest since 2008.
In a note to clients, Deutsche Bank writes…
Since the UK referendum the US yield curve has flattened to new post-crisis lows… This relentless flattening of the curve is worrisome… the probability of a recession within the next 12 months has jumped to 60 percent, the highest it’s been since August 2008.
U.S. residential construction growth is grinding to a halt.
Even auto sales, which have been a bright spot for the U.S. economy for several years, are rapidly slowing.
Payroll growth has also dropped like a rock, and we await this Friday’s non-farm payrolls report update.
Do not panic folks. Deutsche Bank is saying that the odds of a recession are about the same as a coin-flip, 12 months from now.
The yield curve is still healthy.
Once the yield curve goes flat or even inverted, we usually have 3 to 6 months before a recession. The flat or inverted yield curve signal will give us plenty of time to react.
While the stock market could crash at any time between now and the end of October, a stock market crashing from a recession is an entirely different matter. Do not confuse a stock market crash with an economic downturn. A stock market crash could happen at any time and will come like a thief in the night. We will have plenty of time to react to a flat or inverted yield curve before the next economic recession.