Last month’s inversion in the 10-Yr./3-Mo. Treasury spread further tilts an already lopsided scale in favor of a U.S. recession in 2023. That spread has been considered the gold standard from an economic forecasting perspective, and is the basis for the New York Fed’s Recession Probability estimate (which, by the way, should break above its critical 35% threshold when it’s published later this month.)
After Consumer Price Inflation spiked to a 12 1/2-year high of 4.2% in April, there’s been a torrent of analysis decrying the collapse of “real yields”—including the real Treasury-bond yield, real S&P 500 dividend yield, and even the real S&P 500 earnings yield. Since all of these yields already traded at extremely low nominal levels, the inflation adjustment makes every one of them look even worse. For example, the real yield on 10-year Treasuries just sunk to -2.60%, the lowest reading since 1980 (Chart 1).
The 1999 leadership parallels we discussed in the latest Green Book remain intact—U.S. over foreign, Growth over Value, and Large over Small. Small Caps have given up most of the “beta bounce” enjoyed in the first two months off the December low, with one Small Cap measure—the Russell Microcap Index (the bottom 1000 of the Russell 2000)—undercutting last year’s relative strength low and those of 2011 and 2016.