Three items to discuss today:
#1: The future of a popular recession indicator – the difference in yield between 10-year and 3-month Treasuries. This is the sole input for the NY Fed “Recession Probability” model, so often cited by market watchers and the financial press.
Here is the data for that measure back to 1980 (top chart is the Treasury yield spread, bottom chart is recession probabilities, current month highlighted):
There’s the problem, however:
- With Fed Funds stuck at the lower zero bound, 3-month Treasury yields are likely capped at around 0.20% for several years to come.
- 10-year Treasuries currently yield 0.74%, which makes for a 0.54-point spread. That equates to about a 20% chance of recession in a model where anything higher than 10% is a clear warning sign.
- Getting to an all-clear with this model (less than 5% recession odds) means seeing the spread rise to 2 points, with 10-years yielding 2.2%.
Bottom line: this widely watched recession indicator may be flashing a warning sign for years to come since long rates are unlikely to breach 2% as long as the Federal Reserve keeps to its current policies.
#2: Some background on that surprising US Retail Sales number today, which showed that Americans spent $485.5 billion on staple and discretionary purchases in May, up $73 billion from April’s COVID-constrained environment.
First, consider the fact that retail sales, which are not inflation adjusted, have only declined four times on a year-over year basis since record keeping started in 1992. The first was right after 9-11 (-0.5%), the second was in the lead up to Gulf War II (-1.7%), the third was the Great Recession (-11.5% at its worst) and the fourth was the COVID Crisis (-19.9%) because of retail closures.
Here is a long-term chart for reference:
As for what drove this month’s $73 billion uptick, which was well ahead of expectations:
- Motor Vehicles and Parts: +$30.2 billion month-over-month
- Food Service and Drinking Places: +$8.7 billion
- Clothing: +$5.3 billion
- Furniture/Home Furnishings: +$3.7 billion
- Building Materials/Gardening: +$3.6 billion
- Gas Stations: +$3.3 billion
- Sporting Goods: +$3.3 billion
- Nonstore retailers (aka online stores): +$7.2 billion
Worth noting: this classification was 17.8% of total retail sales, far higher than May 2019’s 12.3%. Online is still winning even as brick and mortar reopens.
The bottom line here: there was strength across the board, even in expensive durable goods like Motor Vehicles, which supports the idea that the US consumer is returning to form at least for now.
#3: We were struck by this chart from Apple Mobility Trends, which shows vehicular, pedestrian and mass transit congestion by measuring the number of rerouting requests by Apple Maps users.
It shows that, broadly speaking, the number of people moving around in the US (grey line) and Germany (purple line) have returned to pre-COVID levels at roughly the same pace over the last 2 months. Italy (blue line) is catching up and the United Kingdom (green line) still lags.
Here is the chart:
Bottom line: This certainly confirms the same upbeat narrative as the US retail sales data in the prior point, even as it may be surprising since the US and Germany had such different COVID-19 experiences.