Exactly one year ago, the S&P 500 bottomed on the short-term bear market, which led it to fall by more than 20% from January to October 2022. On the following day (October 14, 2022), stocks reversed, closing with a +2.60% gain, and did not look back since.
The U.S. bond market has since gone from signaling an impending recession to signaling that interest rates will remain high for a longer period. This is due to a steepening yield curve, which is caused by long-dated yields rising faster than short-term yields.
While a steepening yield curve is often seen as a sign of a recession, in this case, it is likely due to the still-strong U.S. economy and the Fed's outlook for higher rates. This is known as «bear steepening.»
In other words, the bond market is signaling that the economy is still strong enough to withstand higher interest rates, but that those higher rates may eventually lead to a recession.
Visually, the steepening of the yield curve may appear as a positive sign, suggesting that the economy is at a relatively lower risk of a recession.
However, history offers a different perspective. In reality, when the yield curve experiences bear steepening, it typically implies that the market expects the Federal Reserve to delay interest rate cuts.
As a result, long-term yields, which reflect these expectations, rise at a faster pace compared to short-term yields.
Source: Refinitiv, Cepital Economics
As depicted in the chart, this event is quite uncommon, and when it does happen, it has historically had a significantly higher likelihood of being followed by a recession.
In fact, these previous occurrences were typically succeeded by substantial decreases in long-term U.S. government bond yields and more stringent
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