But that alone should not reassure the world’s largest economy of a false sense of security. With markets flooded with declining signals, a team of experts warns that the US economy may be heading for a recession. High energy and commodity prices, hyperinflation, the rapid easing of the yield curve and the slowdown in the economy are all signs that things are not going well. But Wall Street is now more concerned with a more ephemeral but powerful red flag: the negative correlation between oil stocks and the wider US stock market. The correlation between the S&P 500 Energy Index and the broader S&P 500 has become negative for the first time since 2001, thanks to a combination of rising oil prices and technology sales. The S&P 500 has returned -6% year-on-year, far from the energy index, up 39% year-on-year. The IT Index is even worse, falling 10% in the long run. Analysts now warn that such large deviations have preceded a recession. The bubble bursts Commodity Context founder Rory Johnston told Bloomberg that the last time the correlation between oil and gas reserves and the wider market was so great, the Dotcom bubble burst. “With oil prices as high as they are, this will be positive for energy reserves and negative for the rest of the overall economy,” Johnston said. According to Johnston, the gap between energy and the wider market has been widening since the beginning of the year, but has been “exaggerated” since Russia invaded Ukraine in late February and sent oil prices above $ 100 a barrel, importing at the same time a new geopolitical danger. in the stock market. Like most long-term trends, the usually positive correlation between the energy sector and the wider market is likely to return to the average price. However, analysts warn that there will be no gentle landing. “In order to significantly reduce energy prices, we could be talking about a downturn, so the S&P 500 would also fall significantly and therefore the correlation would be positive again,” Stifel Nicolaus analyst James Hodgins told Bloomberg. . Great Inflation 2.0; Given that the correlation between energy stocks and the rest of the stock market tends to remain positive in both good and bad economic cycles, it is not a very reliable measure of the state of the economy. Wall Street has found other criteria – and the yield curve is one of the favorites. The yield curve is the difference (or “spread”) between the yields of short-term and long-term government bonds. An inverted yield curve, where short-term bonds yield higher than long-term ones, has correctly predicted every recession since 1955, with only one false signal in almost 70 years. And a blinking warning sign: On Wednesday, the difference between the two-year and 10-year yields on US government bonds fell to just 0.2%. Even if we assume that the yield curve gives another false red flag, which means that we are not on the brink of recession, the alternative is also not very encouraging. Because the only time an inverted yield curve did not lead to a recession meant something equally bad: “High Inflation,” which lasted from the mid-1960s to the early 1980s. The US inflation rate has now reached 7.9%, a level last seen in 1982 – around the time the last Big Inflation ended. But it could get even worse: traders are now pricing US inflation at 8.6% by March and April, before Federal Reserve officials still have a chance to raise a possible 50-point interest rate hike. base in May. The Fed last week raised its interest rate for the first time in four years, raising the Fed Funds’ interest rate by 25 basis points. “It simply came to our notice then. The increase in interest rates by 25 basis points, without quantitative easing, has almost added fuel to the fire. Main Street says, “We can raise prices as we wish, without taking into account competition.” So far, so good, “Gang Hu, a TIPS trader with the New York hedge fund WinShore Capital Partners, told MarketWatch. That said, several critical signs of a recession remain in the green. First, industrial production, a key indicator of economic strength, rose 0.5% in February to 103.6% above the 2017 average and 7.5% above what it was at the time last year. The U.S. Markets Index (PMI), which tracks the climate among buyers working in construction and construction companies, reached 57.3 last month, more than 6% higher than the US average over the past decade. Meanwhile, the US fiscal policy uncertainty index, which measures policy concerns, also fell to 139 in February from 200 in December 2021, indicating fears of a Federal policy accident. Reserve or the Biden government is weakening rapidly. Perhaps the outcome of the crisis in Ukraine will be the last glass that will push the US economy into a full recession or return it to a state of recovery. By Alex Kimani for Oilprice.comMore top readings by Oilprice.com:
