U.S. stocks were set to open lower Wednesday morning, giving back some of Tuesday’s solid gains, after the U.S. bond market flashed a troubling signal about the U.S. economy.
The yield on the benchmark 10-year Treasury note on Wednesday broke below the 2-year rate, an odd bond market phenomenon that has been a reliable indicator for economic recessions. Bank stocks led the declines in the premarket as it gets tougher for the group to make a profit lending money in such an environment. Bank of America and Citigroup all fell more than 2% in premarket trading.
“The US equity market is on borrowed time after the yield curve inverts,” wrote Bank of America technical strategist Stephen Suttmeier.
There have been five inversions of the 2-year and 10-year yields since 1978 and all were precursors to a recession, but there is a significant lag, according to data from Credit Suisse. A recession occurred, on average, 22 months after the inversion, Credit Suisse shows. And the S&P 500 actually enjoyed average returns of 15% 18 months after an inversion before it eventually turns.
“Historically speaking the inversion of that benchmark yield curve measure means that we now must expect a recession anywhere from six-to-18 months from today which will drastically, and negatively, shift our medium-to-longer term outlook on the broader markets,” Tom Essaye, founder of The Sevens Report, said in a note on Wednesday.
Investors also remained attuned to trade developments and their effects on the global economy, after weaker-than-expected data in China deepened the gloom in the world’s second-largest economy. Official data published Wednesday showed growth of China’s industrial output slowed to 4.8% in July from a year earlier, marking the latest sign of faltering demand in the country.
The world’s two largest economies have imposed tariffs on billions of dollars’ worth of one another’s goods since the start of 2018, battering financial markets and souring business and consumer sentiment.
The data after the U.S. moved to delay tariffs on some Chinese imports in the previous session.
The United States Trade Representative announced Tuesday that certain products including clothing and cellphones were being removed from the tariff list based on “health, safety, national security and other factors” and will not face additional tariffs of 10%. Other tariffs will be delayed to Dec. 15 from Sep. 1 for certain articles, it said.
Wall Street stocks soared shortly after the announcement, with the Dow jumping as much as 529 points before settling to finish the day 372 points higher.