Link to the article above.
The market was talking about a possible recession in the next two years as a result of a yield curve inversion that happened in the last couple of weeks. This yield curve inversion is believe to be a good indicator of recessions in the past.
However, ironically, the yield on both the short and long term has been heavily manipulated since the global financial crisis as a result of QE. However, if we take out this distortion, the spread stands at around 135 bps, which is far from from an inversion.
Moreover, the conditions are different now compared to the 1970s, in which we experienced an inflation led recession. Currently, the labour market remains very strong; saving rates remains elevated after more than 2 years of lockdowns as a result of covid; property prices have appreciated. Inflation actually showed signs of slowing down in the first quarter this year but still elevated as a result of the Russian invasion into Ukraine. Market participants are closely monitoring the situation in Eastern Europe as a permanent stop will eliminate one of the root cause of inflation in 2022.
However, market has already started to price in a possible recession. Market participants are anticipating a very aggressive FED in which the interest rates are expected to be raised to 3% in the coming year (restrictive monetary policies). The issue is that the inflationary pressure is a cost-push one and the factors contributing to inflation is external forces, not within the US. The main contributors are a zero covid policy in China (China exporting inflation) and the Eastern European crisis. Raising interest rates will not caused much of an effect except curbing economic growth and consumption in which I believe FED may be reluctant to do it. On top of that, the current stock market corrections globally, in itself is a consumption depressor which will deflate inflationary pressure from the consumption angie as well.
As such, I see this as an opportunity for the mid to long term investors to buy into the market. There’s too much bad news in the market today in which, over time will definitely be gone. Examples are Eastern European war and the covid crisis in China. I don’t see the possibility of a full blown recession but more of a hiccup to growth.
As the Singapore’s economy is very tied to the rest of the world, ultimately if the rest of the world experienced a slowdown, Singapore will be spared. The question that i am asking myself is that if this slowdown will eventually lead to a recession, in which i am not eliminating the possibility to zero, but a very low one.