Fears have been growing in recent months over the long-term implications the US-China trade war will have on the economy, with the two nations locked in a bitter tit-for-tat tariff spat. US President Donald Trump has recently ramped up the pressure by raising tariffs on a list of $200billion worth of Chinese imports from 10 percent to 25 percent. The American leader has also threatened to slap 25 percent tariffs on an additional $300billion worth of Chinese goods should the nations fail to reach an end-game in their trade spat. China has retaliated to US aggression by raising duties on a revised list of $60billion worth of US products to as high as 25 percent.
New analysis from Morgan Stanley, one of the top investment banks on Wall Street, claims the warning signs of the US economy heading into the red were sounded almost “six months” ago.
Fears intensified back in March, when the spread between the three-month Treasury bill yield and the 10-year note yield shrank to its narrowest level since August 2007.
A narrower spread between the three-month and 10-year yields indicates increased market expectations of a recession.
While the spread might not indicate an immediate recession, an inverted yield curve is traditionally seen by economists as a sign one is likely over the next year or so.
Michael Wilson, chief US equity strategist for Morgan Stanley, suggested the adjusted yield curve first inverted in November.
He said: “The adjusted yield curve inverted last November and has remained in negative territory ever since, surpassing the minimum time required for a valid meaningful economic slowdown signal.
“It also suggests the ‘shot clock’ started six months ago, putting us ‘in the zone’ for a recession watch.”
At the time, some lenders suggested the bond market warning could “be less powerful for recessions than in the past” because low and negative rates had driven buyers into Treasurys.
Long dated yields across regions “have become more correlated”, Goldman Sachs strategists argued.
Yesterday saw 10-year yields driven about 10 basis points below the 3-month rates, pushing the inversion to its deepest in almost 12 years.
The 10-year note yielded 2.269 percent while the three-month bill yielded 2.356 percent.
Mr Wilson also pointed to a fall in manufacturing activity across the US, which fell to its lowest level in almost a decade in May, as a reason for investors to be concerned about the economy.
In its flash Purchasing Managers Index, IHS Markit said its US Manufacturing PMI declined to 50.6 from a final reading of 52.6 in April, marking the lowest level since September 2009.
Mr Wilson said: “Recent data points suggest US earnings and economic risk is greater than most investors may think.”
The Morgan Stanley report also pointed to US services sector activity hitting a more than 19-month low in March.
The Institute for Supply Management (ISM) said its non-manufacturing activity index fell 3.6 percentage points to 56.1, the lowest since August 2017.
In terms of the stock market, the Dow Jones and broader US stock market finished sharply lower on Tuesday.
The Dow ended the trading day down 237.92 points, or 0.9 percent lower, at 25,347.77.
The S&P 500 declined 0.8 percent to 2,802.39, while 10 primary sectors reported declines, with consumer staples falling 1.7 percent.
Morgan Stanley economists have lowered their second-quarter US gross domestic product (GDP) forecast to 0.6 percent from 1.0 percent.
It comes after JP Morgan last week cut its own second-quarter outlook to 1 percent from 2.25 percent.