Recession fears were triggered after the yield on two-year US government bonds exceeded that of a ten-year note, causing an inverted yield curve which has historically signalled an incoming recession.
An inverted yield curve is a rare occurrence, with the last one recorded with US Treasuries in 2019.
The typical pattern show that investors look for a higher return and a consequently higher yield on long-term bonds compared to shorter-term bonds to compensate for the bigger risks in the transaction.
However, once the opposite happens, it has tended to signal danger of an approaching recession. The notion is not far-fetched, in light of the spiking cost of living in everything from food to fuel as inflation skyrockets to 6.2% across the UK.
UK retailers and operators have already felt the foreboding strain on consumers spending, and with the small measures given by Rishi Sunak’s Spring Statement unlikely to make a substantial impact, harder times for households are no doubt ahead.
Analysts noted the domino effect from the growing economic pressure and warned of difficulties in the coming months.
“Central banks have already started the typical course of action when you have high inflation, namely putting up interest rates,” said AJ Bell investment director Russ Mould.
“They will need to walk a careful path, not being too aggressive with the pace and scale of rate rises so that it chokes off the economy.”
“Despite a healthy jobs market and resilient consumer spending of late, stock markets have already been pricing in an economic hit later this year.”
“For example, just look at the sharp decline year to date in UK consumer-facing stocks such as retailers and restaurant operators.”
“It doesn’t much to realise that more expensive energy, food and fuel bills will eventually cause consumers to think twice before spending money.”