Recessions are painful. Shrinking output tends to mean huge job losses, stagnant incomes and widespread misery.
And when that recession is in the world's largest economy, it's a major headache for its trading partners, not least the UK which sells 30% of its exports to the US.
Investors are increasingly concerned there's an American recession brewing.
Of course, they, and also economists, can get it wrong. But is there a sure-fire way of predicting recessions?
Government bond markets may be one the most accurate form of financial tea leaves.
A central bank study in the US found that the bond markets had successfully foreshadowed all five US recessions since 1955.
Those bonds, known as Treasuries in the US, are issued as a form of borrowing by governments, to fund spending.
They come with different lengths of maturity - and offer investors a rate of return, paid out in regular instalments.
That rate is a fixed proportion of the ultimate value of the bond. As bonds can be freely traded, their prices change.
If demand is high, the price rises, and the bond's rate of return relative to the market price, or its yield, falls. Conversely, a lower price means a rising yield.
What influences the price of bonds? Their relative attractiveness compared to other investments (if the yield is high and so price low, buyers are likely to be lured in) and also, expectations of further interest rate movements.
What does this have to do with a recession? Analysts monitor the yields of bonds across the range of maturities, right up to 30 years to plot the yield curve.
The lower the yield, the lower the expected interest rate, the worse the economy is expected to be performing.
Bonds with a longer maturity would be expected to have a higher return anyway, to compensate holders for inflation and a longer holding period.
Typically, when the outlook is for activity to expand at a healthy clip, the yield curve will slope upwards, implying interest rates on an upward trend.
But if the yield curve "inverts" - normally meaning the yield on a 10-year bond is below that of 2-year bond, it serves as an economic health warning.
But how good are these curves for predicting recessions?
The bond markets were dependable signals of all the recessions in the US since 1955.
But in the mid-1960s, the inversion of the Treasuries yield curve was followed by a slowing in activity rather than an outright contraction.
So it's not foolproof but it's probably the most reliable indicator around
What the yield curve doesn't tell us is when the US economy could go into reverse.
Over the last 60 years or so, recessions have begun from 9 to 24 months after a yield curve inverts. At present, the unemployment rate is a very modest 3.7%, while the economy continues to grow apace. But a turning point may not be far off.
What's more, predictions drawn from yield curves may be self-fulfilling.
Much as consumers react to warnings about tough times by reining in spending, banks tend to become more cautious about lending when they notice the yield curve inverting.
Less credit swilling around- in the form of mortgages, car finance, cards or corporate loans - equals less spending to fuel growth.
The warning from the bond markets should be taken seriously - and not just by those in the markets.
Capital Economics warns that there is 30% chance of the US entering recession within 18 months: just in time for the run-up to the next US presidential election.
Theresa May walks back to 10 Downing Street after delivering a statement in London on Dec. 12
Photographer: Chris J. Ratcliffe/Bloomberg The European Union won’t step in to try to save Theresa May’s job and will wait to see how the challenge to her leadership plays out before taking decisions about Brexit’s next steps. EU governments are watching developments anxiously ahead of Wednesday evening’s vote on the prime minister, knowing that it could destroy two years of tough negotiations and lead to the U.K. crashing out of the bloc without a deal, diplomats said. Ambassadors from the EU’s remaining 27 countries started meeting in Brussels at 1 p.m. to discuss the events, with one describing a nervous atmosphere that gets tenser and tenser. No decision about delaying the U.K.’s exit beyond the scheduled March 29 date -- nor of publishing formal or legal assurances to the prime minister over the Irish backstop issue -- can be made until January, diplomats said. An emergency summit might need to be called in the new year to do that, one said. The EU has long thought that keeping May in her post was the best chance of getting the Brexit deal approved and preventing a disorderly exit by Britain. But officials in Brussels and national capitals believe they have gone as far as they can and are wary of interfering in domestic politics at such a sensitive time. One senior diplomat said the EU considered U.K. politics an “absurd drama” and patience was wearing thin.
May has staked her job on being able to get the Brexit deal endorsed by the U.K. Parliament. With huge opposition to it among lawmakers, the bloc says it’s open to providing some additional language but won’t unpick the draft treaty.
“We do not have any intention of changing the exit agreement,” German Chancellor Angela Merkel told the country’s lower house of parliament in Berlin on Wednesday. “That is the general position of the 27 member states and in that sense it cannot be expected that we will emerge from the debates with any changes.”
If May gets through the challenge to her leadership on Wednesday, she is due to join the other EU leaders for a summit in Brussels starting Thursday afternoon. She is expected to address them on Brexit before leaving the room so that they can discuss the situation without her.
EU leaders plan only a limited response this week to help May sell the agreement to Parliament. They will issue a statement following their discussion which might provide her with a glimmer of reassurance but European diplomats acknowledge privately that any steps they take are unlikely to be enough to win over U.K. lawmakers. They say that contingency planning for no-deal is now well under way.
“As time is running out, we will also discuss the state of preparations for a no-deal scenario,” European Council President Donald Tusk said in a letter to leaders ahead of the summit.
While the EU is open to providing fresh assurances over the backstop agreement that aims to prevent a hard Irish border, they won’t reopen negotiations on the substance of the deal. And they won’t make the backstop temporary, as May is asking.
TOKYO/LONDON (Reuters) - A worrying sign of inversion in the U.S. Treasury bond curve is dulling the appeal of the developed world’s highest-yielding bond market for foreign investors.
Overseas investors are reviewing their investments or shunning Treasuries as rates at the short end rise above those at the longer end and make it unprofitable for holders of these bonds to hedge their currency risks.
The difference between short- and long-term bond rates, or the yield curve, has contracted in recent weeks as rising U.S. interest rates meet growing doubts the world’s biggest economy may be slowing down, weighing on longer-dated yields.
And as short-term yields move higher than longer-term yields, the cost of hedging exposure to the U.S. dollar has gone up.
“There is the whole issue of hedging costs. That is the one thing that was inconsequential at the start of the year but now it is sizeable,” said Paul O’Connor, head of multi-asset at Janus Henderson in London, whose firm manages $378.1 billion in assets.
“You are knocking off a substantial part of U.S. yields when you buy from the UK perspective and hedge back that exposure. When we buy government debt, we always hedge it. You don’t want to take the FX risk,” he said.
The U.S. Federal Reserve has raised rates eight times since late 2015 and looks set to hike them again next week even as other global central banks stay shy of normalizing policy, causing a significant gap to open up in short-dated interest rates.
The European Central Bank and the Bank of Japan have both kept interest rates below zero percent, while the Bank of England has raised rates only twice from its record low near zero percent set in 2016 after the shock Brexit vote.
As U.S. short-term rates climb, currency forward markets which are closely linked to the differences in interest rates between currencies have moved to price in the higher cost of holding dollars.
For yen-based investors, they must pay around 3.3 percent of their principal investment to hedge the risk of holding dollars. The picture is similar for euro-based investors.
“We won’t buy U.S. Treasuries with currency hedge. The return would be negative after hedging,” said Kazuyuki Shigemoto, general manager of investment planning at Dai-ichi Life Insurance, which oversees assets of 35.6 trillion yen ($316 billion).
Higher hedging costs would not have discouraged investors if longer-term bond yields had risen as much as short-term yields.
The yield on 10-year U.S Treasuries, however, has only risen to 2.8 percent compared with 2.1-2.3 percent before the start of the Fed’s tightening in late 2015. Two-year yields have meanwhile risen 160 basis points, to 2.7 percent.
Last week, a section of the curve inverted when the five-year bond yield dropped below two-year and three-year yields.
Dai-ichi Life’s Shigemoto believes it is only a matter of time before the two- and 10-year yield spread turns negative.
Japanese and European investors hunting for yield among top-rated government bonds are starting to look elsewhere.
“We have seen a real decline in flows, especially from Japan in particular and a lot of them have been directed to European and even Asian assets,” said Bob Michele, head of global fixed income at JPMorgan Asset Management, whose firm manages $491 billion in asset, in New York.
Even emerging markets are offering some value after a violent sell-off earlier this year on trade war concerns.
A JPMorgan global emerging market bond index denominated in U.S. dollars now offers a yield of over 7 percent versus around 5.5 percent at the start of the year, Refinitiv data shows.
TO HEDGE OR NOT
One option is to give up currency hedging. Still, increasing the holding of dollars just when the Fed may be about to slow its pace of monetary tightening could be risky.
“We want to buy dollars on dips. But an inverted yield curve may portend a future recession and there are many other uncertain factors. So we need to carefully look at economic fundamentals,” said Toshinori Kurisu, deputy general manager of investment planning at Nippon Life, which has total assets of 66.7 trillion yen ($592 billion).
Institutional investors are reluctant to take on too much currency risk for regulatory reasons. The U.S.-China trade war and possible U.S. slowdown are also reasons for investors to lower, rather than raise, their risk exposure.
In that case, the ultimate choice appears to be going back to their home markets.
“The attraction of U.S. Treasuries investment with a full currency hedge has declined. So we have been buying investment grade corporate bonds in the hedged U.S. debt space,” said Ryosuke Fukushima, general manager of investment planning at Japan Post Insurance, or Kampo, which has 76.8 trillion yen ($681.3 billion) of assets under management.
Fukushima said Kampo does not plan to radically change its stance because the firm is on course to meet its internal investment income target for the current financial year ending in March.
“But in the plan for next year, which we have just started contemplating, we will consider whether to flip back to JGBs from hedged foreign bonds, which we see as substitute for JGBs,” he said.
Reporting by Tomo Uetake and Hideyuki Sano in Tokyo, Saikat Chatterjee in London; Writing by Hideyuki Sano; Editing by Jacqueline Wong
The pound's fall has accelerated after the prime minister confirmed she would defer the vote on her Brexit deal.
Sterling had already slumped 1% earlier in the day on reports of the delay, but fell further as Theresa May addressed Parliament this afternoon.
At about 16:00, it was down almost two cents against the dollar at $1.2608, its lowest level since April 2017.
It had also fallen 1.3% against the euro to €1.1064, its lowest level since August.
Meanwhile, the domestically focused FTSE 250 share index fell 1.5%, hitting its lowest since December 2016.
The steep falls reflect mounting uncertainty about the terms of the UK's exit from the European Union, analysts said.
"Until the market knows what will happen with respect to Brexit one way or the other then they [traders] will remain extremely anxious," said Jane Foley, head of foreign exchange strategy at Rabobank.
Ms Foley said the threat of a hard Brexit, under which the UK leaves the EU without a deal, as well as the continuing political uncertainty was "an extraordinary and toxic mix" for the pound.
"Once we know what is happening, things will be more settled," she added.
This week had always been expected to be a volatile one for the pound because of the vote on Tuesday, which has also heightened political uncertainty.
Dozens of Conservative MPs had been planning to join forces with Labour, the SNP, the Lib Dems and the DUP to vote down Mrs May's deal.
Neil Mellor, currency strategist at BNY Mellon, said the pound's movements were directly linked to the current political uncertainty.
But he said there was also a question of valuation and how investors "price in Brexit".
The pound's movements over the past decade suggested that the pound could be spared a "drastic fall" over a prolonged period, he said.
Mrs May made a statement to MPs at 15:30 GMT, confirming that the vote would be delayed because it "would be rejected by a significant margin".
She said MPs backed much of the deal she had struck with the EU, but there was concern over the Northern Irish backstop.
She said she believed she could still get the deal through if she addressed MPs' concerns.
And that, she added, was what she intended to do in the next few days.
However, Speaker John Bercow - who chairs debates in the House of Commons - called on the government to give MPs a vote on whether Tuesday's vote should be cancelled, saying it was the "right and obvious" thing to do given how angry some MPs were about the cancellation.
Eoin Murray, head of investment at Hermes Investment Management, said: "The vote could be delayed for as little as a week, or even put off until January. At this stage, it is unlikely to directly impact the timing of the Article 50 process, as Prime Minister May has repeatedly refused to countenance shifting that from the 29 March date."
However, there is a theory in the market that the turbulence could work in the government's favour, encouraging MPs to back Theresa May's deal to avoid a no-deal Brexit.
Silvia Dall'Angelo, senior economist at Hermes Investment Management, said: "In our - admittedly low confidence - base case, stress in financial markets and pressure from businesses should lead to a last-minute approval of the deal in Parliament."
Dr Adam Marshall, director-general of the British Chambers of Commerce, said: "Avoiding a messy exit from the EU is a matter of national urgency. Efforts must be redoubled to find a route forward, while at the same time ensuring that preparations are stepped up to help businesses and communities deal with any potential scenario."
Ivory Coast sold an additional 200,000 metric tons of cocoa from the current crop after arrivals from the harvest’s first two months exceeded the period’s pre-allocated deals by more than a third, according to two people familiar with the matter.
Le Conseil du Cafe-Cacao, the industry’s regulator, disposed of the extra volumes through direct sales after farmers produced more than the 450,000 tons that were auctioned prior to the season’s beginning at the start of October, said the people, who asked not to be identified because they’re not authorized to speak publicly about the matter. The additional sales didn’t cover any default contracts, which will be tallied and reviewed by the middle of December, said the people.
Producers in the world’s top cocoa grower sent an estimated 676,509 tons of cocoa to ports from Oct. 1 to Dec. 2, compared with about 504,000 tons a year earlier, according to a person familiar with government data. The recent sales lifted Ivory Coast’s obligations for the bigger of the two annual harvests, which ends in March, to 1.7 million tons from 1.5 million tons, said the people.
A spokeswoman for the regulator didn’t answer calls seeking comment.
While the cocoa harvest in West Africa got off to a record start, farmers’ fortunes will depend on the intensity of the looming Harmattan, desert winds in the Sahara that usually bring dryness to growing regions from December to February. Weather forecasters have also warned of the risk of an El Nino formation, which may affect the pace of deliveries for the rest of the season.