Bonds flash another recession warning sign, even as Dow rallies 240 points
The Dow staged a comeback on Wednesday, even as the bond market was once again flashing a recession warning sign.
The 10-year US Treasury yield briefly fell below the 2-year yield Wednesday afternoon. It marked the second time the yield curve inverted this month.
A yield curve inversion happens when long-term bond yields fall below short-term yields. That rare phenomenon is considered a recession indicator. Every recession in modern history has been preceded by a yield curve inversion.
Nevertheless, stocks finished higher, clinging to their gains.
The Dow finished 240 points, or 0.9% higher, while the S&P 500 and the Nasdaq Composite closed up 0.8% and 0.9%, respectively. All three indexes reversed the losses they incurred on Tuesday, when the Dow and the S&P ended three-day winning streaks.
Investors barely reacted after the Fed published the minutes from its July meeting Wednesday afternoon. During the July meeting, the Fed cut interest rates for the first time since 2008. The minutes showed that most Fed policymakers supported the rate cut.
But the minutes noted that the Fed was keeping its options open about future rate cuts. It may reduce interest rates in the future, but the Fed doesn’t believe this is the beginning of a long, sustained period of rate cuts.
Expectations for an additional quarter percentage point cut in September are at 98%, according to the CME FedWatch tool.
President Donald Trump once again lashed out against Fed Chairman Jerome Powell early Wednesday. “The only problem we have is Jay Powell and the Fed,” he said on Twitter, adding that there would be “big U.S. growth if he does that right thing.”
“Sentiment seems to be improving on the hope for signals of more monetary easing from the Fed and other global central banks in the days ahead,” wrote Priscilla Thiagamoorthy, economic analyst at BMO, in a note to investors.
That shift in sentiment is helping boost riskier assets like stocks and is leading the 10-year Treasury yield higher. The yield last sat at 1.5825%.
Adding to the hopes of monetary policy sentiment, Trump said Tuesday that his administration was looking at additional tax cuts.
Gold, also a safe haven investment, slipped, with prices down 0.3% at $1,500. Oil prices settled 0.8% lower at $55.68 per barrel, pulling back from earlier highs following a report from the US Energy Information Administration showing falling inventories in the United States.
The US dollar, measured by the ICE US Dollar Index, was up 0.1%.