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Weakening economy already experiencing 3 signs of a global recession, economist warns
Central banks cutting rates, the risk-free rate flattening or inverting and the break-even rates collapsing are three signs that the markets are headed for a global slowdown, an economist has warned.
The managing director, chief economist and head of research at RBC Capital Markets, Su-Lin Ong, was speaking at the Bloomberg Asia Briefing Live when she outlined the bond market signs that should be warning investors of an impending global slowdown.
This forecast is despite Treasurer Josh Frydenberg having warned investors about the dangers of over-correcting after Tuesday’s correction in the equities market.
Global central banks
Bond markets across the G7 nations, or the seven most advanced economies in the world, are showing signs they expect monetary policy to continue easing in order to get growth back on track.
“It has been a particular volatile time in global markets, particularly in the last week or so,” Ms Ong noted.
Explaining the instructive nature of bond markets, Ms Ong said their current state is telling investors that the central banks are expected to “come to the party” through rate cuts.
“The markets are looking for a nearly a full percentage point of further easing from the Fed. There are expectations of Bank of Canada following at some point, Europe as well – which is already at minus 0.4 per cent. Clearly the Reserve Bank here has been active. [And] New Zealand delivered a 50 basis point cut yesterday,” she said.
According to the economist, the markets have already factored in future rate cuts as central banks continue to support lower growth numbers.
“There is very much anticipation that there will be further global easing to support what looks increasingly like a slowdown in growth,” she continued.
The risk-free rate
The risk-free rate, or the 10-year bond market as it is commonly known, has flattened and in some cases been inverted, which means the short-term yields are higher than the longer-term yields, Ms Ong said.
In the bond market, the effect of this is that long-term debt instruments are offering lower rates of interest than short-term debt instruments.
“What’s instructive when we look at 10-year bond yields (the risk-free rate), these yields have collapsed in the last few months with a particularly sharp leg down more recently. In some countries, like Australia, they are at historic lows,” said Ms Ong.
Break-even rates
Break-even rates in the bond market are also showing signs of longer-term lower inflation rates, Ms Ong flagged.
“It really is an indication from markets of inflationary expectations,” she said.
Noting that this “is what’s worrying policymakers globally”, Ms Ong said that in some cases, such yields are sitting at historically low levels.
“I’ve worked in markets long enough to know they don’t always get the timing right, but the direction is usually right,” she continued.
Concerns about weaker growth, risk of recessions, heightened geopolitical risks, relying on central banks to come to the rescue and this real embedded low inflation [are signs of a weakening economy],” Ms Ong concluded.
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