Four of the five charts in today’s note paint the picture of a slowing growth environment, with increasing odds of a recession. The biggest issue for investors, in our view, is will that growth slowdown be paired with higher inflation? The answer likely sits with commodities which have seen their short-term trends damaged but are still above key levels for the long-term bullish case to hold.
RbP Regime Index
The RbP Regime Index is a snapshot of key trends across fixed income, commodities, and equities. The six-month slope of the index broke in February and the ratio remain in a downtrend. Until broken support is reclaimed, it is hard to make a bullish case for risk assets.
Semiconductors vs. the S&P 500
While they flatlined for much of 2021, the semis have now broken down vs. the S&P 500. The six-month slope turned negative in March, ahead of the ratio breaking support in June. Given the increasing amount of semiconductor content in the products that we use, semis can be considered an indicator for the health of the global economy.
High Yield vs. Treasuries
The ratio of high yield credit to treasuries is in a clear downtrend, below the declining 50 and 200-day moving averages. The bearish price trend is confirmed by the 14-day RSI of the ratio, which has not been overbought in more than a year and frequently finds itself below the 60-level.
The 10-Year – Three-Month Curve
Earlier this year when the 10-2 curve briefly inverted, some pointed out that while the inversion was interesting, it is really the 10-Year – Three-Month Curve that must be watched for increasing recession odds. At the time, that curve was still widening. Now, however, it has gone into a precipitous decline. This is one to have on the radar as the Fed continues to raise rates.
Bloomberg Commodity Index
While the charts above paint a clear picture of a growth slowdown. The question is will that slowdown be paired with rising or falling inflation? The answer likely lies with commodities. They have been hit hard of late, doing much short-term technical damage. However, zooming out in the weekly chart paints a less bearish picture. The index is bouncing from the 40-week moving average above the 105-breakout level.
Holding these marks paint a picture of higher inflation, a breakdown sends the opposite message.
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