Bear, Recession or Correction?

Mar 18, 2025

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One of the recessions predicted by the yield curve was the most recent one: The yield curve inverted in May 2019, almost a year before the most recent recession started in March 2020. There have been two notable false positives: an inversion in late 1966 and a very flat curve in late 1998.

Moving on…

More generally, a flat curve indicates weak growth and, conversely, a steep curve indicates strong growth. One measure of slope, the spread between 10-year Treasury bonds and 3-month Treasury bills, bears out this relation, particularly when real GDP growth is lagged a year to line up growth with the spread that predicts it.

Not seeing it outside of recessions, which steepen the curve via the short-end tumbling.

I plugged in the 10yr-3mo spread mentioned by the Cleveland Fed. I cannot remember when I made that drawing, but I can see what I was looking for: a pullback to the base of the spread, after which a breakout move higher could continue.

Going back to the top chart. The only comparable period from the Cleveland Fed’s recession indicator is the early 1980s back-to-back recessions accompanied by inflation-killing rate hikes. This is an anomalous period or possibly a major secular trend-change. For this reason alone, it warrants increased skepticism.

Every steepening event in the 2s10s produced at minimum a correction and a recession. The vertical lines show market tops.

There’s nothing to forecast from this next chart, it’s a sign post. Fed funds typically track with the 2-year yield. When the spread gets up around 75 bps, the Fed is almost guaranteed to cut. The Fed telegraphed cuts in July 2024, resulting in a spread spike as traders priced in cuts.

Breaking the 3.50-percent area will open a potential plummet in the 2-year. The Fed would likely start talking rate cuts again around 3.50 percent. Not forecasting, but thinking of history: a common path here is the Fed ignores weakening data because inflation, but around when the 2-year is at 3.50 percent, the bottom drops out from the market, data, and the Fed is chasing with big cuts. That’s a recession scenario.

What’s going to cause the 2-year yield to tumble 50 bps from here? A weak economy or cooling inflation.

What’s the Fed model forecasting then? The 10-year yield chart is far messier than the 2-year, with no discernable topping pattern. It indicates inflation fears are more forward looking, reflecting the surveys on inflation expectations. The 10-year has further to drop if inflation cools, flattening the curve and forestalling the kind of spike that produces a recession.

Best case for a top is that the 2007 interest rate is a ceiling.

Want to see a scary chart?

The bull or no-recession scenario, ironically, includes a slowing growth scenario where demographics pin interest rates at a level last seen during the gold standard era.

Inflation cooling appears quite possible. Check out this headline:

Why OPEC+ is Supporting a Potentially Disastrous Rise in Oil Production

So economically vital is it to most OPEC+ members that oil prices are kept at the higher end of recent historical levels that the organisation has not increased production since 2022. In fact, at that point it had begun a series of collective oil production cuts to support oil prices, totalling around 5.85 million barrels per day (bpd), or around 5.7% of global supply. As recently as December, the cartel extended its previous round of 2.2 million bpd in output reductions to the end of this quarter. Industry estimates are that the first phase of the removal of these production cuts will total about 138,000 bpd in April, with much more to come. “Part of this move [OPEC+ oil production increases] results from repeated overproduction from some of its members, most recently from Kazakhstan [following the Tengiz expansion project], Iraq, and Russia, although Moscow has been doing a lot of it as dark inventory [unofficial output] to sidestep sanctions,” a senior source in the European Union’s (E.U.) energy security complex exclusively told OilPrice.com last week. “Another part comes from the group wanting to protect its market share, given the major shift in the supply-demand balance that’s unfolding,” he added. “And the final part of it is the fact that OPEC+ doesn’t think it can win an oil price war against the U.S. with Trump in his second presidency, given how badly it did in the last two [oil price wars],” he concluded.

A bullish, no recession scenario would see inflation fall. Lower interest rates combined with lower energy prices gives enough of a tailwind to the economy that it never dips into recession. Housing limps along. Wage growth helps with housing affordability.

What about equities? The S&P 500 Index reversed off the 1929-2000-2022 trendline yesterday. Equities are at bubble valuations. The good, no recession scenario is a shift into a world of cheaper energy and lower inflation at least for awhile, but one that will also likely experience slower growth. A bear market will probably cause a recession, similar to how the 2000 bear market triggered a mild recession, but a bear market doesn’t require a recession. A bear market will happen if stocks mean revert to median historic valuations.

Gold meanwhile is arguing the opposite of lower inflation. It is hitting its stride, with silver finally trying to play catch-up too, though still below the October high.

Copper-gold:

Looks like a potential base on the daily chart. Copper is $5 per pound today.

Gold/crude ratio is breaking out. Nothing good has ever happened on the way up here.

Gold divided by a corporate bond total return index.

Is anything good going to happen if these charts don’t stop rising?

Meanwhile, we’ve been looking at U.S. rates, but how about Canada? It’s 2s10s is more advanced.

Germany

Gold might be screaming more about risk overseas, which may explain why the U.S. data isn’t screaming recession yet.

What Does It All Mean

Short-term stocks can go anywhere. A rally up to a new all-time high into September 2025 would fit the pattern of the late 1990s market, assuming the Fed’s forecast at the top of this article proves somewhat prescient. A correction is measured by the market itself, with economic data likely confirming a stock market move after the fact.

Rising gold is bad. Something is broken, somewhere, and odds are it is overseas.

Copper and oil are headed in opposite directions for the moment. Copper would make a new monthly closing high up here. Oil is threatening a breakdown below $60 per barrel.

BYD announcing it can charge a battery up to near 300km range in 5 minutes could be playing a role here in the short-term, and potentially the long-term. Even if the Green movement has been mostly toxic for the world, boosting electricity production via nuclear energy such that crude demand declines, will eventually produce a cheaper energy future. This is the type of advance needed to unlock a new phase of EV adoption.

If a recession is coming in a disinflationary scenario, the curve will steepen via the 2-year heading for 3.50 percent, at which point rate cut talk will have heated up again.

If the 10-year yield steepens the curve by rising, the initial interpretation will be faster growth or stagflation. It will require confirming data. The housing market is probably in deep trouble if rates go higher though, and a bad downturn in housing can sink the economy by itself for a time.

In the very short-term, the S&P 500 Index reversed at the “pop and drop” point, the weakest rally resistance line drawn on the chart.