(New York)

On paper, the odds of a recession have never looked very high. It is only human instinct that makes many believe that is where we may be headed. However, that is starting to change. Since the Financial Crisis, the odds of a recession in the next 12 months held very low, around 5%. However, they have just jumped to 16% according to a popular recession calculator from BBVA. The last time the figure was higher was during the last recession. The two big factors boosting the odds are the US’ flattening yield curve as well as the threat of a trade war, which is hard for anyone to gauge. According to an economist at BAML, “Our calculations suggest that a major trade war would lead to a significant reduction in growth … A decline in confidence and supply chain disruptions could amplify the trade shock, leading to an outright recession”.

FINSUM: The models seem to be starting to catch up to what many innately know—that the economy and markets have been running hot and storm clouds are on the horizon.

(New York)

Markets got hit with a double whammy yesterday. Escalating trade tensions absolutely nailed equities, but in a move that surprised some, US Treasuries did not gain. For essentially the last 30 years, whenever equity prices took a big hit, Treasury bonds tended to gain on their safe haven value. However, yields on the ten-year actually rose a point yesterday. The reason why appears to be the Fed’s very optimistic position on the US economy, which compels many to believe rates are headed higher, making Treasuries less appealing.

FINSUM: Markets, both stocks and bonds, are caught between a burgeoning trade war and a rate tightening cycle. Doesn’t sound very bullish.

(Washington)

The Chinese stock market is now in a bear market and there is a great deal of pressure on its currency. Last time there was this much pressure, in 2015, the market broke, with stocks plunging and the yuan devaluing by 7% over the year. US stocks even plunged in fear. Now, the situation looks like it might occur again, causing some to call the yuan the next “big short”. The currency is already down almost 1% since Friday, and is in negative territory for the year. A burgeoning trade war with the US is adding pressure.

FINSUM: So the one big support for the yuan is the current strength of the Chinese housing market, which has been strong recently (a big contrast to 2015). That seems like it will keep a blow out from happening.

(Washington)

In what seems to be a perfect study in the law of untended consequences, the government’s new focus on tariffs are driving US manufacturers out of the country. American motorcycle maker Harley-Davidson (side note: can you think of a company more American than Harley-Davidson) has announced it will move some production off-shore because of retaliatory EU tariffs on American motorcycles. Europe is one of the biggest consumers of US products, including for Harley, and the company does not want to lose market share by raising prices for European consumers.

FINSUM: This is the downside of a trade war. Trump wants to have more US manufacturing jobs at home, but retaliations can cause perverse economic incentives to move manufacturing overseas.

(New York)

The Dow had a very ugly day yesterday, as did the Nasdaq and S&P 500. However, that might just be the beginning, argues Barron’s. Markets plunged as Trump escalated the trade stand-off with China and other US trading partners, including limiting Chinese investment in American technology companies. And while markets have been looking at a possible trade war for months, it seems as though they have not fully priced in one of the magnitude which now looks to be emerging. According to one analyst, “Markets are starting to price in the possibility of a trade war with China, however, I would argue that a true trade war–one that drives us into a worldwide recession–would lead to a 20% or more drop in prices, so we haven’t priced one in yet”.

FINSUM: This is a very ugly, but realistic, prediction. We are increasingly worried about the direction of the international dispute on trade.