Coronavirus is spurring the next recession now

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coronavirus recession

There was talk of a recession before the novel coronavirus started to spread, but those fears have picked up dramatically. The yield curve has now steepened, signaling that a recession is imminent as the coronavirus continues to play out worldwide.

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Steepening yield curve signals recession

In a note on Wednesday, Canaccord Genuity analysts Tony Dwyer and Michael Welch said the steepening of the yield curve not only signals a recession but indicates that one is imminent. Over the last month alone, the U.S. economy has downshifted from reaccelerating to almost a complete shutdown due to measures to deal with the coronavirus, which they expect to trigger a recession.

They noted that the two-year and 10-year Treasury yield curve steepened to 64 basis points after inverting on Aug. 26. In the last seven cycles, recession has also ways come after curve inversions. However, they believe the length of time between the inversion and the next recession has been pulled forward by the social distancing mandates due to the coronavirus.

Recession has already begun amid the coronavirus

In their recent commentary, management from Crescat Capital said the recession has already started.

“Stocks are acting like it’s the Great Depression again and we believe a recession has already begun,” they wrote.

The said the probability for a U.S. recession jumped above 50% on one Bloomberg indicator, reaching the highest level since the global financial crisis. They added that the indicator leads unemployment changes by five months with a correlation of 0.81. Further, they said it suggests the labor market has peaked.

Crescat Capital management believes corporate earnings will plunge, and unemployment will surge, noting that such situations would be “perfectly normal” because of the business cycle.

“It must play out at always to purge the economy and markets of their sins and prepare the way for the next growth phase,” they wrote. “From the February top for large cap stocks, it would take a 56% selloff just to get to long term mean valuations, a 74% decline to get to one standard deviation below that.”

Here’s what the Fed is doing

The Federal Reserve has been resorting to historic measures to keep money moving as the economy lurches to a virtual standstill. The Fed announced that it will start up the Primary Dealer Credit Facility again, which was originally set up in 2008. The facility enables primary dealers to support the functioning of the market and make credit available to individuals and businesses.

The Fed also launched the Commercial Paper Funding Facility, which was also last use during the global financial crisis. The facility enables the central bank to buy unsecured and asset-backed commercial paper from eligible companies.

Spreads in the commercial paper have widened quickly, Nomura analyst Lewis Alexander and team said in a note this week. The central bank also cut rates …read more

Source:: ValueWalk

      

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