Portions of the Treasury yield curve have inverted while other portions have not. In either case, the yield curve isn't indicative of an economy that is getting ready to explode. Rather, some would argue it is indicative of an economy getting ready to implode.
Those respective paths have entirely different implications, so which is it going to be at this proverbial fork in the road?
Listening to Bank of America CEO Brian Moynihan, it sounds like one should stick a fork in the negative interpretations of the yield curve and slide them to the side of the plate where peas and carrots go to hide.
What He Said
Bank of America (BAC) derives nearly 90% of its revenue from the U.S., and it is the second largest bank in the U.S., trailing only JPMorgan Chase (JPM), with $2.38 trillion in total assets and $1.38 trillion in total deposits. It's a big bank indeed, evidenced by the government's designation that it is a systemically important financial institution.
This column isn't about Bank of America, though. It's about what the bank's CEO said following the first quarter earnings report and how his take on matters made a flat yield curve look a little less daunting as a leading indicator.
Specifically, Mr. Moynihan said, "Economic growth and consumer activity in the U.S. continue to be solid, businesses of every size are borrowing and driving the economy, and asset quality is strong."
His view of things wasn't echoed verbatim by the CEOs of other banks reporting earnings this past week, yet there wasn't a single CEO who sounded an economic alarm based on the trends they are seeing in their business.
Sure, some acknowledged that economic activity seems to be slowing, yet none said that they are worried about a recession happening anytime soon.
That view is aligned with a recent Bank of America/Merrill Lynch fund manager survey in which it was reported that 86% of global fund managers surveyed don't think the yield curve inversion is signaling an impending recession.
We know what you're thinking. When everyone is thinking the same, it probably means the opposite is bound to happen.
Well, we're here to tell you that a recession is going to happen. It's inevitable. We just don't know when it is going to happen. Signs are afoot, however, that suggest 2019 will be a recession-free zone.
More Cheer than Fear
Regular readers will recall that we have paid attention to the flattening yield curve, pondering what message can be extrapolated from it.
Is it presaging a recession in the U.S.? Is it signaling a latent fear that the bull market is going to unravel? Is it simply a byproduct of a seeking-yield trade with interest rates so low, and even negative, in other developed countries?
The yield curve is pregnant with I-told-you-so possibilities. It's fair to say, however, that the stock market isn't bothered by such possibilities.
The Philadelphia Semiconductor Index is up 35.0% year-to-date; the information technology sector is up 25.1% year-to-date; the industrials sector is up 21.6% year-to-date; the consumer discretionary sector is up 21.1% year-to-date; and the Dow Jones Transportation Average is up 19.9% year-to-date.
That's not fear and loathing about the economic outlook. It's cheer and gloating -- and corporate credit spreads seem to be joining in the chorus. They aren't exploding. On the contrary, corporate credit spreads have been imploding since mid-January.
The collapse in credit spreads has coincided with the rebound in oil prices, which is a defiant recession indicator in its own right, as is the uplift in copper prices and the 50-yr low in initial claims.
What It All Means
The U.S. economy could be doing better. Then again, it could be doing a lot worse, as suggested by the shape of the Treasury yield curve, which a number of bank CFOs said is going to curtail their net interest income growth.
The latter could be a precursor to reduced lending activity that curtails the pace of economic growth, yet Mr. Moynihan, the CEO of the nation's second-largest bank, and Jamie Dimon, the CEO of the nation's largest bank, didn't sound any alarms on that front either.
It's quite reasonable to think economic growth will moderate in 2019 given the tough comparisons driven by the fiscal stimulus in 2018, the trade uncertainty, and the lingering weakness in the eurozone.
At the same time, it's becoming more reasonable to think that recession calls borne out of the shape of the Treasury yield curve can be pushed to the side of the plate where peas and carrots go to hide.