The US markets ended rather terribly overnight despite Fed’s steep dovish turn, with re-emerging trade war threat in the background. Drastic moves were seen in the bond markets with yield curve now indicate intensified risks of recession ahead.
The most reliable recession indicator is now flashing red after yesterday’s moves in the bond markets. The spread between 3-month yield and 10-year yield has narrowed sharply and at brink of inverting. The slope of 3-month and 10-year yields is watched by most economist and seen as the best recession indicator.
The technical development in 10-year yield (TNX) suggests that it’s only starting to get worse. TNX dropped -0.079 to close at 2.535. Indeed, the strong break of 2.554 support indicates resumption of fall from 3.248 high with solid downside momentum. Key fibonacci level of 38.2% retracement of 1.336 (2016 low) to 3.248 (2018 high) at 2.554 looks rather vulnerable. Decisive break will confirm medium term reversal, which could open up the case for deeper fall to 61.8% retracement at 2.066, which is close to 2.034 support and 2% psychological level.