Oil, US bond market change could be a warning about upcoming recession

The falters in oil price and US bond market on Tuesday warned people that recession is coming. Fear of recession doesn't only happen in the US as the global market also experiences similar issues. For example, the Euro reached its lowest level in 20 years this week.

Businesses and households in the US got hit directly due to rising costs of various necessities, including food and fuel. There is also an increase of borrowing costs across the country. Last week, the Institute for Supply Management even revealed declines in employment and new orders in the manufacturing sector in June 2022.

Changes in oil, US bond market

On Tuesday, the oil price saw the steepest drop since March this year. Brent, which is the international benchmark for oil price, experienced a drop close to 11% leading to €98.69 (approximately US$101.31) per barrel. Meanwhile, West Texas Intermediate had a 9.4% drop and the price went down to US $98.25.

Commodities strategists from Citigroup predicted that oil price can drop to US$65 per barrel by the end of the year. The drop might even continue to the end of 2023 until it reaches US$45. However, OPEC and the allies could intervene before the price gets to that level.

Data from the US bond market also provided a new insight into the economic situation. Its yield curve experiences a situation called an inversion. The 2-year Treasury yield has exceeded the 10-year benchmark yield. This yield curve showed 0.003% rate difference, with the shorter yield duration at 2.792% and the longer duration at 2.789%.

Inverted yield curve affects banks across the nation. It measures the difference between the banks’ costs of operation and incomes from activities like investments and loans. If banks can’t make money from their activities, they will reduce loans. Economic activities will slow down as a result.

Historically, a drop in oil price and inverted yield curve had preceded every US recession that occurred in the past 50 years. Because of that, investors will be looking closely at the data.

To solve this issue, the Federal government typically will increase interest rates. Futures market has projected that the Fed will raise the rates to 3.3% by the start of 2023. Investors are worried that the increase can make the situation even worse, though.

Recession unlikely to happen in 2022

Although the fear has infected the market, Wall Street economists shared that they don’t think recession will happen in 2022. It doesn’t mean that it won’t happen at all as the economy may go into a period of contraction in 2023. To make sure that recession has occurred, there needs to be contraction in two consecutive quarters.

Gregory Faranello of AmeriVet Securities said that the Fed is still considering whether to deal with growth and inflation first, but leaning more toward inflation. According to him, Jerome Powell from the Federal Reserve had mentioned that the government body is “worried about bringing inflation down to 2%”.

The Fed will release reports from its recent monetary policy meeting on Wednesday. On Friday, investors can also look at US jobs reports to see the situation with the labor market. Those data will have a significant influence in the Fed’s decision.