Does the Past Experience Still Work?

Peterson

Commodity

Energy

Bond

Economic

Summary:

The hottest topics these days are the U.S. Treasury Securities and crude oil. The yield of the U.S. Treasury Securities continues to rise, but the inverted phenomenon has improved. The price of crude oil continues to rise, while the price of copper keeps falling. The "copper-to-oil ratio" hit a new low in the past year. Does it indicate the risk of recession?

In the past, from historical experience, the inversion of yields of the U.S. Treasury Securities is often an important signal of economic recession, but it seems to have great limitations. For example, this round of interest rate hikes by the Federal Reserve has caused the 10-year and 2-year yields of the U.S. Treasury Securities to remain inverted for 13 months since July last year, but the U.S. economy does not seem to show signs of recession. On the contrary, the market generally expects that the U.S. economy will have a "soft landing".

In the past 43 years, there has been a statistical correlation between the inverted yields of the U.S. Treasury Securities and the economic recession. At present, the phenomenon of inversion has improved, and as long as it is based on the resilience of economic fundamentals, the long-term yield will rise sharply. This inversion improvement is more like the economic crises in 1980 and 1982, but it is different from the subsequent four economic crises, mainly because the short-term yield driven by the Fed's interest rate cut is down, and the interest rate cut generally means the Fed's confirmation of the deterioration of economic prospects, and the inversion improvement is more regarded by the market as a signal that the economy is about to fall into recession. At present, if there is a rate cut and a short-term downtrend, it will be closer to the signs of recession.

At present, another leading indicator "copper-oil ratio" reveals the risk of recession again. As a "global economic barometer", the price of copper has fallen by nearly 10% since the end of July, while the ratio of copper to oil has been falling to around 88.0 since June, the lowest since November last year. According to historical experience, whenever the ratio of copper to oil goes down, it will warn the risk of economic recession like the index of "the yield curve of the U.S. Treasury Securities is inverted". So, has the classic "leading indicator" of the U.S. recession failed? Is it still instructive?

We will not discuss its effectiveness for the time being, but given the current situation, it is foreseeable that with the further reflection of the lag of monetary tightening in Europe and the U.S., the economic prospects in Europe and the U.S. will cause demand-side concerns. At the same time, the "grey rhinos" such as the possible U.S. government shutdown in mid-November, the U.S. auto workers' strike that continues to grow, and the uncertainty over China's economic recovery, as well as the risks that might be masked rather than disappear, so we have to be cautious. Even if there is no so-called recession risk, the U.S. Dollar Index soars and non-US currencies depreciate sharply, and if the oil price climbs to US$100+ again, the impact on the global economy will be far greater than that of last year, which will hit the demand side hard, and it is also doomed that the oil price will not go far further. Perhaps OPEC countries will stop reducing their holdings or even increasing their production earlier.

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Does the Past Experience Still Work?

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